All Cases For Strategic Management Text and Cases, 10th Edition By Gregory Dess, Gerry McNamara, Alan Eisner, Seung-Hyun Lee and G.T. (Tom) Lumpkin Cases 1-38 Teaching Note Case 1 — Robin Hood Case Objectives 1. To provide an introduction to the conceptual framework of strategic management using a non-business situation. 2. To introduce students to the process of problem identification and potential solution analysis that will be used in case discussions throughout the semester. See the table below to determine where to use this case: CASE OBJECTIVES TABLE Chapter Use Key Concepts 1: Strategy Concept Leadership for strategic management; sustainable competitive advantage; vision, mission, strategic objectives; external environment; internal environment; efficiency vs. effectiveness; stakeholder management Case Synopsis Robin Hood and his Merry Men are now in trouble because wealthy travelers (their source of revenue) are avoiding the forest. As is often common in an entrepreneurial organization, the Merry Men were highly motivated by Robin Hood‘s leadership. Therefore, Robin had previously relied on informal communication to organize and implement operations. Robin is pleased with the growing size and influence of his organization. However, growth has meant that specialized duties have begun taking up most of the men‘s time, leaving a command vacuum between Robin and the first line recruits. In addition, they are now all located in a large encampment that can be seen for miles. This creates the probability of a surprise attack on their position. Growth has also put great pressures on resources, so now they must harvest the forest more thoroughly. Where will additional revenue come from? Rich travelers are avoiding the forest, so in desperation Robin is considering robbing the poorer travelers, which means his lieutenants must now tell their men to rob their brothers and fathers. What started as a rebellion is in danger of being routinized into banditry. Robin must therefore begin to evaluate the Merry Men‘s mission in view of the changing environment. Should it still be an extension of his private grudges and aspirations? Has the organization acquired a new mission, if so what is it? Who are the key stakeholders here? On whose behalf should the organization formulate its mission?!
Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Teaching Plan Most students are familiar with the Robin Hood story, so it‘s possible to ask them to read this short case in class during the first or second class meeting. Either use the PowerPoint slides or ask the discussion questions directly. As students respond, either write answers on the board or refer to the PowerPoint slide answers. It‘s up to the instructor whether or not to assign Chapter 1 prior to discussing the case. If the case is read before the chapter is read, then the instructor has the option to ask students, when they do read the chapter, to identify the concepts in the chapter that they recognize from the case discussion and come to the next class prepared to share what they recognized. If the case is discussed after students have read Chapter 1, the instructor can ask students to identify what concepts apply from the chapter. Summary of Discussion Questions Below is a list of the suggested discussion questions. You can decide which questions to assign and which additional readings or exercises to include to augment each discussion. Refer back to the Case Objectives Table at the beginning of this Teaching Note to identify any additional readings and/or exercises so they can be assigned in advance. 1. What is the purpose of strategy? 2. What strategic problems does Robin Hood have? 3. What is the role of the organizational leader as strategist and articulator of global goals? 4. What are some issues in this organization‘s external environment? 5. What is the relationship of the organization‘s internal structure to its environment? 6. How do stakeholder values or culture influence strategy making? 7. What strategy can Robin Hood implement? Discussion Questions and Responses Chapter 1: Introduction and Analyzing Goals and Objectives 1. What is the purpose of strategy? Strategy is all about the ideas, decisions, and actions that enable a firm to succeed. See Chapter 1, Exhibit 1.1: Strategic management consists of the analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages: ● strategy directs the organization toward overall goals and objectives; ● includes multiple stakeholders in decision making; ● needs to incorporate both short-term and long-term perspectives; TN1-2 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
● recognizes tradeoffs between efficiency and effectiveness.
Strategic management involves: ● Analysis of strategic goals (vision, mission, strategic objectives), and of the internal and external environment; ● Decisions – Formulation about what industries to compete in and how to compete in those industries; and ● Actions – Implementation to allocate necessary resources and design the organization to bring intended strategies to reality. An interesting question that the instructor can ask at this point is: What business is Robin Hood’s organization in? Some students might say philanthropy, some might say robbery. The answers to this question will help students understand the importance of vision and mission: the leader must have a clear idea of the purpose of the business, and with whom it competes, in order to craft strategy. If the business is robbery, there are different competitors, like highwaymen. 2. What strategic problems does Robin Hood have? If strategy is all about the ideas, decisions, and actions that enable a firm to succeed, what might Robin Hood need to assess as he ponders his likelihood of future success? As Robin Hood‘s organization has grown, food resources are becoming scarce and it has encountered a profit squeeze: revenue is down, and costs are rising. In addition, there are cracks in the culture of the organization; as the organizational membership has increased, discipline problems have emerged. The original business model of ―robbing the rich and giving to the poor‖ appears to be no longer viable, and the ―competition‖ from the Sheriff is growing stronger as the Sheriff increasingly uses his ―alliances‖ and connections with Prince John to get better organized. In addition, ―new entrants‖ into the Sherwood Forest environment, the barons, are proposing that Robin join with them to restore King Richard. If this happens, Robin Hood‘s mission may no longer be relevant because the need to restore ―justice‖ may no longer exist. Issues that need to be addressed include: ● Has Sherwood Forest become too small to sustain operations? ● How to avoid detection of the now ―major encampment‖? ● What to do about the growing strength of the Sheriff‘s forces? ● How to address organizational communications and redefine the leadership focus? Decisions that need to be made include: ● Should Robin Hood impose a fixed transit tax in order to increase revenue? ● Should Robin Hood kill the Sheriff? ● Should Robin Hood accept the barons‘ offer to join in freeing King Richard? Consequences to be considered include: ● What might happen if Robin expanded operations beyond Sherwood Forest? ● Does the change in the external environment mean that the original mission is no longer valid? TN1-3 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
● If Robin Hood decides to kill the Sheriff, accept the barons‘ offer or impose a tax on travelers, how do each of those actions link to the original mission? ● If the mission changes, to what degree does Robin Hood have to worry about the loyalty of stakeholders? If Robin Hood expands operations beyond Sherwood Forest, that may solve his revenue and resource problems, but it will create issues with organizational communications – he can‘t keep track of his men now, so what will happen if the physical environment changes even further? Would his existing organizational structure still work with a larger group? It appears as if the changing conditions might also mean a shift in the original mission, especially if Robin decides to impose a fixed transit tax. Killing the Sheriff might satisfy Robin‘s ―personal thirst for revenge,‖ but it wouldn‘t improve the situation, especially because someone else might take up the Sheriff‘s role. Likewise, if Robin decided to align with the barons, his group would have to accept amnesty, and how many of his ―men‖ would feel good about this? There was no assurance that the barons‘ plan would work, plus this would require a real shift in overall mission from banditry to court political intrigue, and multiple stakeholders might object (how would the poor people feel?). The major issue concerns the rapid growth of the organization and the changing external environmental conditions. In the space of two years the organization grew from fragmentation and obscurity to a strong regional presence. Competitive strategy is about sustaining a position in the industry. Growth implies that strategy has to be flexible enough to adapt. Does Robin have a sustainable strategy? 3. What is the role of the organizational leader as strategist and articulator of global goals? Leaders face a large number of complex challenges. Leaders must be proactive, anticipate change and continually refine changes to their strategies. This requires a certain level of ―ambidextrous behavior‖, where leaders are alert to opportunities beyond the confines of their own jobs and are also cooperative and seek out opportunities to combine their efforts with others. Leaders must make strategic management both a process and a way of thinking throughout the organization. See Chapter 1, Exhibit 1.6. The primary role of the organizational leader is to articulate vision, mission, and strategic objectives. Robin Hood needs to evaluate his initial vision of the organization‘s purpose: what was the original goal that evokes a powerful and compelling mental image of a shared future, one that would be massively inspiring, overarching, and long-term, that represented a destination that is driven by and evokes passion? Is the original vision irreconcilable with the present circumstances? Robin Hood‘s organizational mission may have to change: a mission encompasses both the purpose of the company as well as the basis for competition and competitive advantages. Organizations must respond to multiple constituencies—multiple stakeholders—if they are to survive and prosper, and the mission provides a means of communicating to these diverse organizational stakeholders. TN1-4 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
If the vision and mission have to change, Robin Hood must establish strategic objectives to operationalize the mission statement. That is, objectives help to operationalize the mission statement with specific yardsticks, and they provide guidance on how the organization can fulfill or move toward the ―higher goals‖ in the goal hierarchy—the mission and vision. Therefore, Robin Hood needs to redefine the organizational vision and mission because it may have changed—rebellion may have become routinized into banditry. He must also identify the key stakeholders, broadening his focus beyond his own private grudge to include the needs of the district, the region, or the nation. And he must establish new goals and strategic objectives. Depending on the stakeholders, these new goals may include replacing the Sheriff or changing the political order. Robin should remember that short-term objectives can become essential components of a firm‘s ―action plan‖ and therefore can be critical in implementing the firm‘s chosen strategy. 4. What are some issues in this organization’s external environment? Strategy analysis is the first step in the strategic management process. It precedes effective formulation and implementation of strategies, involves careful analysis of the overarching goals of the organization, and requires a thorough analysis of the organization‘s external and internal environment. To begin with, Robin must take a look at the issues in the organization‘s external environment. There are obvious resource constraints. Sherwood Forest has finite resources: the inputs into the organization (travelers to rob) have dwindled, especially because the rich travelers have started avoiding it. Robin Hood‘s band is spending past gains on present problems in the assumption that future revenues will continue to grow at the same pace as in the past. This assumption, one that is often pervasive in successful organizations, may be unwarranted. The Merry Men are reduced to robbing poorer travelers. The poor travelers are their mainstay of political support. Here is a common pitfall of success, the tendency of organizations to take their best and most important customers for granted, to extract from them the highest return for least effort in the belief that they have no practical alternative. In addition, trained manpower is scarce. Regarding the physical environment, the current growth of the organization has created a large encampment that can be seen for miles and is therefore now a target for attack. The nature of the Merry Men‘s environment and operations requires stealth and flexibility. The current physical facility does not provide for this.
5. What is the relationship of the organization’s internal structure to its environment? See the Chapter discussion of the tradeoffs between effectiveness and efficiency. Given the growth of the operation and other changes in the external environment, Robin Hood‘s previous structure may no longer be effective. He may no longer be able to achieve the goals of the organization. He might need to make tradeoffs. TN1-5 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
His current structure is functional, with each lieutenant a specialist. Communication has been informal, and Robin currently has no direct link to his first line recruits. This structure performed well in the early days of the band. However, with the growth of the organization, this has become problematic, resulting in lack of coordination. Robin might want to consider a possible new structure: his lieutenants could do double time as staff and line personnel, fulfilling their staff duties in off-peak periods, but available for line duty during field operations. Robin might also want to consider creating a decentralized regional operation, with sub-bands who can operate out of smaller regional headquarters and better coordinate movements. This will increase flexibility of the total organization by moving the organizing of operations closer to those who undertake them. This will also reduce the chance of attack because then only part of the band might be detected and surprised. Decentralization also pushes food gathering down the line, thereby eliminating food distribution problems. Small-scale operations can be carried out with greater economy. 6. How do stakeholder values or culture influence strategy making? During strategic analysis, the leader does ―advance work‖ to anticipate unforeseen environmental developments, identify unanticipated resource constraints, assess changes in his or her preferences for how to manage. During strategy formation, depending on the type of organization structure, the leader might include key individuals in a discussion around selecting which strategies might be best to implement at which level within the organization. In strategy implementation, the leader must ensure proper strategic controls and organizational design and establish effective means to coordinate and integrate activities within the firm, as well as with suppliers, customers and alliance partners. Therefore, leaders must pay attention to all stakeholder needs, including the group‘s values and the organizational culture. See Chapter 1, Exhibit 1.5 for the diverse stakeholder groups and the claims they make on the organization. Regarding the organizational culture, it was based on founding values that embraced a missionary outreach to the community. The original purpose created unity and a spirit of daring among the Merry Men. Robin is considering abandoning the higher (more affluent) segment of his market for a deeper exploitation of a very large segment with limited resources. Here he runs up against organizational traditions and values. If Robin pursues profit maximization now (robbing all travelers, including the poor), the group will become thieves. Group members will resist stealing from their brothers and fathers. The larger community of poor people, who originally supported the Merry Men, will now feel abandoned. Loyalty will be eroded. Robin needs to restore the group members‘ and larger stakeholders‘ need for order and purpose. The Merry Men might need to feel that their participation is quasi-voluntary. They may need to feel more involved in strategic decision making so they can see shared value in the organizational efforts. 7. What strategy can Robin Hood implement?
TN1-6 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
The basic question strategic management tries to answer is: How can we create competitive advantages in the marketplace that are not only unique and valuable but also difficult for competitors to copy or substitute? Robin Hood must assess how functional areas and activities ―fit together‖ to achieve goals and objectives. If the organization is still Robin‘s extension of a personal grudge, then displacing the Sheriff should be the primary mission of the Merry Men. If the organization is acting on behalf of the district then replacing the Sheriff with a more benign administration should be the priority. If, however, the Merry Men‘s existence is an expression of widespread dissatisfaction with the present political order, then Robin should consider his potential contributions on a national scale. An analysis of the options confronting Robin ought to lead the students to question the criteria by which strategy is judged. Who is the lead actor in strategy? The chief executive officer? Top management? A coalition of stakeholders? There is clearly no theoretical answer to these questions. A discussion ought to set the ground for an appreciation of the political and structural forces under which strategy emerges. Robin should have a meeting with the Merry Men to explain the strategic dilemma and long-term issues. He needs to increase organizational discipline, which could be done by creating a clearer organizational structure with strategic controls that enforce the mission. To do this, he needs to recruit qualified leaders for the new decentralized structure and involve lieutenants in the solution. It is always an issue—which functions should be decentralized and which retained at the corporate level. In this case intelligence gathering and finance should probably be kept centralized. It is crucial for students to appreciate the contradictory pressures that implementation generates. The new decentralized structure will call for more intricate communication and command systems. It increases flexibility but also increases the probability of breakdown and mismanagement. Currently, individual runners must keep the various sub-bands in communication. This is a primitive technology that may be insufficient to ensure coordination. An opportunity exists here for the students to appreciate to what extent sophisticated organizational forms are made possible by modern technologies, such as instant messaging systems, which are ordinarily taken for granted. While restructuring is going on, Robin must begin to consider other aspects of his strategy. He should examine the possibility of diversifying beyond the confines of his traditional forest territory. This is viable if he is decentralized. Operations can be carried on in the countryside by the autonomous sub-bands. He must also resolve the issue of the proposed transit tax. What should be his relationship to the local population? Should he increase their burden of taxation, or not? Robin must also prepare for the possibility of ceasing operations by providing outplacement training. He should pursue alliances beyond the current band of Merry Men, negotiating a possible change in the political order, negotiating amnesty, returning the band to legality. He should probably avoid contact with the Sheriff!
TN1-7 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Finally, Robin should recognize that mistakes will occur. Therefore he should anticipate the costs of implementation, especially the problems of extended communication. Robin must familiarize his lieutenants with his intentions and the projected problems. They must actively become involved in the evolving implementation. Ultimately, however, Robin Hood must consider the long-term course of action. If the Merry Men were a profit-maximizing organization in the classic sense they would be satisfied with keeping the Sheriff off balance, or perhaps work toward his replacement with a more inexperienced man. They are, however, a missionary organization. To pursue profit maximizing would eventually lead them to thievery. It would also undermine their unity and spirit of daring and affect their relationship with their key community stakeholders. Robin Hood has little choice but to increase his involvement in issues that lie beyond his immediate task environment. One final question Robin Hood must be prepared to answer: has this organization accomplished its mission so the need for the organization no longer exists? Is it time to disband and reallocate the assets in pursuit of a completely new venture?
Teaching Note Case 2 — The Global Casino Industry in 2019 Case Objectives 1. To examine industry dynamics and how the structure of an industry has implications for competition. See the table below to determine where to use this case: CASE OBJECTIVES TABLE Chapter Use Key Concepts 2: External Environment
Porter‘s five forces model; strategic groups
Additional Readings or Exercises NOTE additional Web-linked reading, view embedded videos about the current state of the industry.
Case Synopsis For well over fifty years the casino business has been on a roll, on its way to becoming a $150 billion–a-year global industry. For much of that period, the United States has been leading the charge, accounting for nearly half the global gambling revenues as recently as 2010. Most of these revenues have come from Las Vegas and Atlantic City, magnets for gamblers from around the world. However, Las Vegas and Atlantic City have had to deal with increased competition from other locales. Revenues in other parts of the United States, from waterfront casinos in over TN1-8 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
a dozen states and Native American gambling locations, have exceeded those generated in Las Vegas and Atlantic City. More recently, the dominance of Las Vegas and Atlantic City in the global market had been challenged by overseas casino development in places like Macau, Singapore, Australia, South Korea, Malaysia, and Philippines. Other sites in Asia, such as Japan, Vietnam, Taiwan, and Sri Lanka, were in development as well. In the United States there was a growing tendency to regard casino gambling as an acceptable form of entertainment for a night out. A large part of the growth in casino revenues came from the growing popularity of slot machines, yet facilities in Las Vegas, especially, had spent billions on extravagant and luxurious properties meant to attract the ―high rollers‖ who came often and spent large amounts of money. Las Vegas casinos had tried to move beyond gambling and offer visitors many choices for fine dining, great shopping, and top-notch entertainment. This allowed higher-end casinos to generate revenues from activities other than gambling. Las Vegas, the city, was trying to brand itself as a tourist destination, but would that be enough to stem the flow of Chinese high rollers to Asian destinations? U.S. casino operators were expanding to open facilities in Asia or engage in mergers and acquisitions in an attempt to cash in on this local business, but would it be enough to return significant revenue to U.S. firms? Casinos were also eager to embrace new types of gaming experiences that would attract Millennials who grew up playing video and mobile phone games. Was there enough demand to go around?
Teaching Plan Most students know what a casino is, and they probably haven‘t thought much about the industry beyond the glitz and the gambling. Therefore, this case becomes a good way to introduce the importance of defining the industry and examining the dynamics of competition in the industry from the point of view of certain clusters of companies—companies that are part of ―strategic groups‖ who compete in the same way for the same customers. The structure of the casino industry has changed in recent years due to new forms of competition and the presence of substitutes. Students may have not considered this. Therefore, this case can be positioned early in the course, right after discussion of the strategic concept, to alert students to these issues. Because companies are not passive as far as industry structure goes but can take steps to influence the structure to their advantage, this case can be reintroduced during the discussion of competitive strategy, later in the course, to remind students how external environmental analysis is very relevant to strategic formulation. ICEBREAKER This case can start with an icebreaker. Starting from the perspective of a customer may make it easier for students to transition to a strategic analysis. Have you ever visited a casino? If so, where was it located, and what type of casino was it? Why were you there? What did you think of the casino experience? It is possible that some students may have visited a Las Vegas or an Atlantic City casino, perhaps on a family vacation. Others may have been to a riverboat or Native American casino venue. It TN1-9 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
might be interesting to see students‘ responses regarding the purpose of their visit to a casino location—it might not have been for gambling purposes. Reasons for the visit might include the following: because it was part of my vacation trip; because a convention was held there; to see a sports event; to eat out; to see a show; just to see it, period! The casino industry competes for the family entertainment dollar. If so, it competes with a family trip to, say, Disneyworld. Are the two experiences the same? Might some conservative families not even consider Las Vegas or Atlantic City as a vacation place for their family, because of the gaming or risqué entertainment elements? The instructor may want to put a chart on the board: Where the casino was, and Why the visit was made. If there is diversity among responses, it may make it easier for the instructor to then ask: so if you were the owner of a casino, how would you respond to these diverse reasons for visiting? What strategic issues do you need to consider? Who is competing against whom? This flows straight into a discussion of the external environment. Before engaging in discussion, you might want to test students’ basic knowledge regarding the case and the major concepts. Here are some multiple-choice questions to use. (This will get the student‘s attention—they can‘t answer these if they haven‘t read the case!) Which statement is most true? a. A large part of growth in casino revenues comes from slot machines. b. In the United States, Las Vegas and Atlantic City casinos generate more revenue than all other gambling locations combined. c. Macau, the gambling ―capital‖ of Asia, is located in Malaysia. d. At some Las Vegas casinos, revenue from non-gaming activities could account for over 70 percent of net revenues. ANSWER: See Case Exhibits. a. TRUE. A large part of the growth in casino revenues came from the growing popularity of slot machines. Coin-operated slot machines typically accounted for almost two-thirds of all casino gaming revenues. b. FALSE. When combined with Native American casinos, gambling revenues in other parts of the United States now exceed the amount that is generated by casinos in Las Vegas and Atlantic City. c. FALSE. Macau is a former Portuguese colony, a special administrative region of China, currently under autonomous rule, similar to Hong Kong prior to 1997. d. FALSE. Non-gaming activity at MGM Mirage in recent years accounted for almost 60 percent of net revenue. Worldwide, the Las Vegas strip generates more casino revenue than anywhere else. a. Yes b. No ANSWER: b. At over $40 billion, Macau generates six times more casino revenue than the U.S. Las Vegas strip. Also see Case Exhibit 2. Summary of Discussion Questions Here is a list of the suggested discussion questions. You can decide which questions to assign, and which additional readings or exercises to include to augment each discussion. Refer back to TN1-10 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
the Case Objectives Table to identify any additional readings and/or exercises so they can be assigned in advance. Discussion Questions: 1. Examine the structure of the casino industry. What has been the effect of the changing industry structure on U.S. casinos? Discussion Questions and Responses 1. Examine the structure of the casino industry.
TN1-11 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Referencing Chapter 2: Analyzing the External Environment of the Firm If you recall, strategy is all about the ideas, decisions, and actions that enable a firm to succeed. See Chapter 1, Exhibit 1.1: Strategic management consists of the analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages: ● strategy directs the organization toward overall goals and objectives ● includes multiple stakeholders in decision making ● needs to incorporate both short-term and long-term perspectives; ● recognizes tradeoffs between efficiency and effectiveness The basic question strategic management tries to answer is: How can we create a sustainable competitive advantage in the marketplace that is not only unique and valuable but also difficult for competitors to copy or substitute? However, an interesting and fundamental question is How do we define the ―marketplace‖? Just what business are we in? Ask students to fill in the blank: Casinos are in the ________________ industry. Some students may say ―gambling,‖ but some may also say ―entertainment.‖ The various answers to this question will help students understand that a firm must have a clear idea of the purpose of its business, and who it competes with, in order to craft strategy. During strategic analysis, the firm does ―advance work‖ through external scanning and monitoring of the external environment to anticipate unforeseen environmental developments, identify unanticipated resource constraints, assess changes in his or her preferences for how to manage. Evaluating the evolution of environmental trends may be critical to crafting a strategic response. In addition, firms must gather competitive intelligence on their rivals in order to anticipate competitor‘s moves and avoid surprises. In order to formulate a competitive strategy, it‘s necessary to assess the segments of the external competitive environment that include competitors, customers or buyers, and suppliers, substitutes and new entrants. Porter‘s five forces model allows strategists to anticipate where the industry might be most vulnerable to competition. The model also helps decide where profits might be best made, or whether there is any chance of further dividing up the profit pie: how attractive is this industry? To answer this question, it is very important to correctly define the industry even further. If we define the casino industry broadly to include any organization that allows people to wager money on events of chance, then we must include Native American casinos, waterborne casinos, and Internet gambling places as incumbents in the industry, along with casinos in Las Vegas and Atlantic City. However, if we define it narrowly to include traditional casinos in Las Vegas and Atlantic City, those that also provide enhanced entertainment, then most Native American casinos, etc. would be substitutes. Either way, the five forces model will capture the impact of all these gambling establishments.
Help students apply Porter‘s five forces of competition by drawing a diagram on the board similar to the following, and having students fill in the details: TN1-12 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Suggested: New casinos increase the fight for customers’ dollars. Also, the investment required has gone up significantly.
Suppliers’ Power Low
Case 1: Robin Hood
Substitutes’ Threat High
Rivalry High
Suggested: No dominant suppliers for casino equipment. Switching costs and threat of forward integration are low.
Suggested: For traditional casinos, capital requirements and regulatory hurdles suggest that entry is not that easy.
Suggested: If gambling is a form of leisure time entertainment, substitutes in the form of theme parks, shows, etc. abound.
Buyers’ Power Med
Threat of New Entrants
Suggested: Ample choices; low switching costs despite attempts by casinos to provide incentives for loyalty; big spenders can bargain for prices.
Med-Low
The following key points emerge from a structural analysis of the casino industry: ● There was industry growth in the United States up until 2010. This should typically decrease the intensity of rivalry as the potential profit pie grows larger. However, intensity of rivalry had increased due to new investment by industry players—the entrance of Native American gambling resorts and waterborne casinos—as well as the overseas development of casinos in places such as Macau. There were more players to compete for the bigger pie. ● Industry players realized that, typically, customer switching cost was low, in that a gambler could switch from one casino to another and shop for the ―best‖ deal. This would typically increase the intensity of rivalry. However, casinos tried to maintain the business of customers by providing complimentary rooms, food, beverage, shows, and other perks. Loyalty programs also provided a means to hold on to gamblers. ● The international rivalry from places such as Macau may have been muted among the big players such as Sands and Wynn, as they used this as an opportunity for international TN1-13 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
expansion. A good deal of consolidation was also occurring in the industry among these big players as they pursued acquisition targets. ● All of Asia-Pacific was under development, with multiple firms hoping to grab a share of the gambling revenues worldwide. Based on the external environmental factor analysis, the casino business is not that attractive an industry, although opportunities for diversification into other forms of entertainment and tourism may be a way to increase profits among the larger players. NOTE — ADDITIONAL READING, VIDEO VIEWING: Regarding sociocultural and demographic trends affecting the industry, read this article about the ―what happens here‖ advertising campaign for Las Vegas, first launched in 2003: http://www.usatoday.com/money/advertising/adtrack/2005-04-11-track-vegas_x.htm. What are the positives and negatives of the campaign for Las Vegas casinos? If you were the manager of a Las Vegas casino, would you be in favor of the campaign? Why or why not? Gaming continues to be big business, as explained in a report from the American Gaming Association: a 2018 study measures the economic impact of every facet of the casino gaming industry—commercial casinos and manufacturers and Native American casinos—as well as the industry‘s significant ripple effect on the supply chain, including local businesses. The American Gaming Association ―State of Play‖ study found that the U.S. gaming industry: ● Contributes $260 billion—nearly a quarter-trillion—to the U.S. economy ● Supports more than 1.8 million jobs and generates over $73 billion in gross revenue ● Generates over $40 billion in tax revenues to local, state and federal governments In addition, a 2019 national survey found that 67% of American adults think the gaming industry provides high-quality entertainment, and 63 percent say casino entertainment options are innovative. The share of American adults that visited a casino jumped to 44 percent in 2019, up nine percentage points from 2018. This trend will likely continue, as almost 124 million American adults—49 percent of the U.S. adult population—say they will visit a casino to gamble over the next 12 months, up 20 million from 2018. This research is being used to encourage policymakers to partner with the industry to create more economic growth for all. See https://www.americangaming.org/state-of-play/. Consultants have suggestions for firms, reporting trends from 2019: Cryptocurrency plays an increasing role, reflecting the opinion people have about its security and anonymity. Online gaming is being done on phones, with the free-to-play feature becoming an entry point for many players. Growing popularity of other online options, including virtual reality experiences, means people don‘t have to leave their homes. This, coupled with the travel time and expense, means land-based casinos may face ongoing decline unless they can innovate. Such innovations include slot machines with a skill component, interactive gaming systems, and new table games. See https://linchpinseo.com/trends-in-the-gambling-casino-industry/. Increasingly, it appears that the industry doesn‘t get its revenue from gaming—much of industry revenue comes from non-gaming activity such as lodging, food, retail shopping, shows, and spas. TN1-14 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
See a two-minute video snapshot of the industry in 2010 at https://www.youtube.com/watch?v=71oEugGTfVo. Things haven‘t changed much since then. What implications might that have for the ―players‖ in this industry? Where should they expect real profits to come from? And in 2014 a video report explains the macroeconomic environment of the Asia-Pacific gaming industry, and that although activity from China regarding anti-corruption efforts is reducing VIP traffic in Macau, the environment remains supportive of the sector‘s growth and credit quality, underpinning a stable outlook on the sector: https://www.youtube.com/watch?v=ZpeKMZLnoPk. Here‘s one report of the differences between Las Vegas and Macau: Macau has half the casinos of Las Vegas but more than twice the gambling revenue. When you get to Las Vegas or Macau, you‘ll probably want to enjoy some time gambling. In Las Vegas, of the 42.9 million people who visit each year, 69% of them ended up gambling, even if that wasn‘t the primary reason for the trip. In comparison, Macau attracts over 30 million visitors, of which 74% gamble. Strangely, the average gambling budget in Las Vegas is $619 compared to Macau‘s $250, yet the gaming revenue in Las Vegas per year is $11.1 billion, which is easily dwarfed by Macau‘s $28 billion. Yet in Las Vegas you can drink and see lots of other entertainment not always available in Macau casinos. See https://www.casino.org/blog/las-vegas-vs-macau-comparing-the-worldsplaygrounds/ Since 2013 the biggest competitors, MGM, Wynn Resorts, and Sands, have all created very successful operations in Macau (Caesars did not enter the market initially, and has now been frozen out due to the lack of available gaming licenses). Although there are widespread allegations of fraud and connections to Chinese organized crime, the financial benefits from this global expansion means these major competitors won‘t back off. According to I. Nelson Rose, a professor at Whittier Law School in California who writes a blog called Gambling and the Law, ―Macau forced the casinos to see that they could become like other large U.S. corporations: set up their plants and operations in other nations and make far more than they can being stuck just in Las Vegas.‖ Sheldon Adelson, CEO of Las Vegas Sands, has described Sands as ―an Asian company‖ with a presence in America. He makes far more in China, where a culture in which notions of luck and fate play integral roles, than in Las Vegas. As MGM CEO Jim Murren points out, ―The Macau market is now larger than the entire U.S. gaming market. Unfortunately for Atlantic City, it‘s gone the other way. It‘s smaller now than when we entered it. The fortunes of the two couldn‘t be more different.‖ Las Vegas would have to attract six times more gamblers each year than it does now—essentially every adult in America—in order to match the amount of money being taken in via casinos in Macau. Based on estimated numbers from 2012, Wynn Resorts now makes nearly three-quarters of its revenue in Macau. Sands, which owns the Venetian and Palazzo, earns two-thirds of its revenue there. In the United States, companies are tweaking their flagship Las Vegas casinos to look and operate more like Macau-style properties. This is because an increasing number of Asians come to Las Vegas, especially, because of the reduced tax on earnings compared to China. Asian visitors now account for 9 percent of tourists to Las Vegas, up from 2 percent in 2008. See the AP report, ―Tiny Chinese enclave remakes gambling world, Vegas‖ by Hannah Dreier, July 8, 2013. http://lasvegassun.com/news/2013/jul/06/us-casinos-macau-headache-abridged/. TN1-15 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
How can you use the above information to do an analysis of the industry? If you were in the casino business, wouldn‘t you want to keep abreast of this kind of information? 1. Continued: What has been the effect of the changing industry structure on U.S. casinos? The concept of Strategic Groups involves two unassailable assumptions in industry analysis, based on the belief that no two firms are totally different, and no two firms are exactly the same. Strategic groups are clusters of firms that share similar strategies in their: ● Breadth of product and geographic scope ● Price/quality ● Degree of vertical integration ● Type of distribution system The value of strategic groups as an analytical tool is that they identify barriers to mobility that protect a group from attacks by other groups; identify groups whose competitive position may be marginal or tenuous; chart the future direction of firms‘ strategies; and allow strategists to think through the implications of each industry trend for the strategic group as a whole. The casino industry can be used to illustrate the existence of strategic groups. To begin with, casino firms that had a large presence in Las Vegas or Atlantic City were more likely to compete with each other. These firms operated larger resorts, which offered a broad range of entertainment that catered to customers from around the country and even other parts of the world. By contrast, the smaller casinos, such as those on the water and on Native American lands, were more focused on gambling and catered more to local and regional customers. As such, these were less likely to compete with the larger casinos that were based in Las Vegas and Atlantic City. Each of these—the LV and AC large resorts vs. the local waterborne and Native American casinos—could therefore be considered to fall into different strategic groups. What might Las Vegas casinos do to craft a sustainable competitive advantage, given the industry they‘re in? In general, the gambling companies in Las Vegas embarked on an aggressive strategy in light of the competition from various sources. They did a number of things: ● Promoted Las Vegas as the destination gambling city—in contrast to Atlantic City where gamblers made day trips from cities in the northeast. Las Vegas positioned itself as a magnet for both the overnight casino gambler, and weeklong vacationer, offering more hotel rooms, myriad dining choices, shopping, and top-notch entertainment. The infrastructure also helped in that Las Vegas was linked by air to major U.S. cities and also to countries outside the United States. ● Casinos in Las Vegas positioned themselves as resorts for families by offering circus performances, etc. However, casinos in Las Vegas did continue to conform to their original ―sinful‖ roots by offering adult-oriented entertainment, further differentiating Las Vegas casinos from casinos in other competing areas. This differentiation strategy was helped by the promotion slogan, ―What happens in Vegas, stays in Vegas!‖ ● Las Vegas casinos constantly invested in refitting and renewal to continue to offer new TN1-16 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
attractions to customers. This meant that Las Vegas convention facilities competed successfully with Orlando and New York for the corporate meeting business. Las Vegas remained the top destination for overnight visitors looking for a casino experience. By differentiating its properties, the Las Vegas casinos attracted visitors and retained their business. Not in the case: On the other hand, casinos in Atlantic City played catch-up with Las Vegas casinos partly because LV had a head start—gambling was legalized in New Jersey a full 45 years after Nevada. From the start, Atlantic City casinos realized that they could not compete with Las Vegas‘s broad range of dining, shopping, and entertainment choices. In addition, AC‘s location in the Northeast highway corridor meant that the majority of customers could easily come as ―day trippers.‖ By promoting its proximity to the beach and the fact that most casinos were located on a boardwalk, AC was originally able to carve out a competitive position in the industry. However, that competitive position eroded. Atlantic City casinos tried to mimic their Las Vegas competitors by sprucing up their establishments. The city attempted a makeover, with the Borgata leading the charge. Casinos added wings to attract overnight customers, and some added outdoor bars to take advantage of the beachfront, but additional expansion was on hold during 2009 and most of 2010, waiting for a change in economic conditions. Then, reports of hurricane damage in 2012 kept visitors away. In short, Atlantic City casinos had been trying to move toward a strategy of differentiation by providing a more attractive ambience, but overall environmental conditions were making this difficult to achieve. The main threats Atlantic City casinos faced (as did Las Vegas casinos) were Native American casinos, slot machines at local racetracks, and Internet gambling. Two of the biggest Native American casinos were in Connecticut, within driving distance of Atlantic City. In addition, several states passed legislation allowing racetracks to provide slot machines for their visitors. Internet gambling had a cost advantage—operators did not have high infrastructure costs, and offshore Web sites were immune to legislation regulating their operation. In addition, competition had grown internationally, especially in the South China Sea city of Macau where casino developers had begun to grow their portfolios. To combat these threats, both Las Vegas and Atlantic City casinos had to continue to try to differentiate themselves. Many industry observers believed that the proliferation of local casinos and the availability of Internet gambling might even be an opportunity for LV and AC, because people who developed a taste for gambling at the local and home venue would probably want to visit LV or AC eventually, to experience the real thing. Challenges AND opportunities for all major competitors remain. See the additional reading and updates below. The major question is which of these firms, and which of these locations or strategic groups do you believe is better positioned for the future? Wynn Resorts, Las Vegas Sands, and MGM are some of the major players mentioned. Does their diversification into Macao and other world markets give them an edge? NOTE – ADDITIONAL READING AND VIDEO VIEWING: TN1-17 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
In addition to Asia-Pacific, the move to legalize online gaming offers another challenge AND opportunity to the big U.S. casino competitors. Online gambling will be licensed state by state, with New Jersey one of the first to allow this in 2013. As one analyst reported, ―Casinos are already positioned to capitalize on the industry‘s paradigm shift and face the least amount of red tape in doing so. It‘s not often that you hear the United States associated with any ―emerging‖ opportunity, but in fact this is how online gambling can be characterized. In Boyd Gaming‘s 2012 annual report, the company (which trades as BYD, and is part owner of Atlantic City‘s Borgata Hotel Casino) boasts of how it‘s well positioned to capitalize on the ―emerging domestic online gaming industry.‖ http://www.newstimes.com/business/fool/article/Why-OnlineGambling-Will-Crush-the-Candy-4480839.php. From 2015 here‘s a report and video about mobile gaming. Although not truly gambling, in-app purchases have become a big business, with the heaviest users spending up to $400 per person per transaction on these online games: http://www.cnbc.com/2015/08/03/the-shocking-truthabout-mobile-gaming.html Regarding the major competitors, on January 28, 2008, Harrah‘s Entertainment was acquired by affiliates of private-equity firms TPG Capital and Apollo Global Management. As the article below points out, this was a bad time to go private. Harrah‘s was ―drowning in debt‖: http://www.fool.com/investing/general/2009/06/24/for-casino-companies-this-is-nopanacea.aspx. So to what degree might mergers and acquisitions really help? Harrah‘s resurfaced as the public company Caesars Entertainment Group (CZR) in 2010. It operated over 47 casinos, hotels and 4 golf courses under several brands, and held rights to the World Series of Poker tournament. See more at http://caesarscorporate.com/about-caesars/. Compare the financial status of competitors MGM (MGM), Las Vegas Sands (LVS), Penn National Gaming (PENN), Wynn Resorts (WYNN), Boyd Gaming (BYD), and Caesar‘s Entertainment (CZR) using these links: http://finance.yahoo.com/q?s=mgm http://finance.yahoo.com/q?s=lvs http://finance.yahoo.com/q?s=PENN http://finance.yahoo.com/q?s=wynn http://finance.yahoo.com/q?s=BYD http://finance.yahoo.com/q?s=CZR&ql=0 During FY 2019, there were 290 casinos in Nevada that grossed $1 million or more in gaming revenue. Together, these casinos generated net income of $2,055,525,922 from total revenues of $24,546,009,009. These results are improved compared to FY18 when a net loss of $1,168,224,369 was recorded on total revenues of $27,107,879,852. ―Total revenue‖ is the money spent by patrons on gaming, rooms, food, beverages, and other attractions. ―Net income/loss‖ is the money retained by casinos after expenses have been paid but prior to deducting federal income taxes and prior to accounting for extraordinary expenses. Gaming revenue accounted for $8,757,658,013 or 35.7% of total revenue. These 290 casinos paid $892,294,136 in gaming taxes and fees, equating to 10.2% of their gaming revenue. Data from the Nevada State Gaming Control Board at https://gaming.nv.gov/Modules/ShowDocument.aspx?documentid=16547. Teaching Note TN1-18 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood Case 3 — Southwest: Is ―LUV‖ at the Limit?
Case Objectives 1. To discuss the choice of competitive strategy, and options for growth. 2. To examine how external and internal forces affect competitive strategy. See the table below to determine where to use this case: NOTE: There are both PRIMARY and SECONDARY chapters that can be used for this case. The Teaching Note gives guidance for the PRIMARY use chapters, and provides suggestions if the instructor wants to use the case to illustrate concepts from the optional SECONDARY chapters. CASE OBJECTIVES TABLE Chapter Use Key Concepts PRIMARY CONCEPT Competitive strategy; 5: Business-Level generic strategies Strategy SECONDARY Industry competition CONCEPTS five forces; general 2: External Environment environmental factors 3: Internal Analysis Value-chain analysis; resource-based view of the firm; VRIN 4: Intellectual Assets Intellectual and human capital
Additional Reading and/or Exercises See optional advanced reading, Porter, 1996; additional reading, embedded video
See optional advanced reading, Freiberg & Freiberg, 1996.
NOTE: At the end of this Teaching Note is an additional OPTIONAL discussion question which instructors can use for advanced students that addresses concepts from Chapter 11: Strategic Leadership, and Chapter 9: Strategic Control. Case Synopsis At the beginning of 2019, Southwest Airlines fared third in the rankings of the best U.S. airlines released by The Wall Street Journal. Delta Airlines ranked first and Alaska Airlines ranked second. These rankings were based on a composite set of parameters forming a scorecard. Southwest did best on two-hour tarmac delays and worst on mishandled baggage. Southwest was beginning to face other challenges: safety violations, fines for flying planes that needed repairs, incidents where the roofs of Southwest planes opened up inflight, killing a passenger in 2018. Although this was the first plane-related death in the airline‘s 48-year history, the signs were there of trust eroding from both employees and the public. Southwest Airlines was the pioneer of the highly efficient ―low-cost‖ strategy. From its beginnings in 1971, the company had become one of the world‘s most consistently profitable major airlines. The company was known for its unique cost-conscious yet fun-friendly culture and subsequent high employee loyalty. Its former chief executive officer and founder, Herb TN1-19 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Kelleher, was a celebrated leader who created a strong company culture and incentives focused on tight cost-control, making Southwest a legendary airline. Gary C. Kelly, the former chief financial officer of Southwest, and CEO since July 2004, had grown Southwest into a company with a net income of over $2 billion by making some bold moves. Southwest had established itself based on its low-cost operations and unique corporate culture, and had flourished with organic growth. However, as opportunities for this kind of growth had disappeared in recent years, Southwest was forced to rethink its strategy. In September of 2010, Southwest announced it was acquiring AirTran. Although this would give Southwest its desired foothold in Atlanta and flight access to Mexico and the Caribbean, this acquisition was a major change in Southwest‘s growth strategy. Although it made Southwest an international airline, the AirTran acquisition made Southwest Airlines a much larger carrier. It now had access to more potentially lucrative markets, but a stagnant air travel market and consolidation among the more dominant competitors meant Southwest had to find additional ways to boost profits—with possible options such as increased fees that might challenge its low-cost perception among air travelers. In addition, as Southwest grew, so did the human resources and operational costs: Its unionized labor force was negotiating more aggressively for increased pay and benefits, and increasing fuel costs and maintenance on different aircraft, including AirTran‘s Boeing 717 aircraft and the new Boeing 737 MAX, would need careful monitoring. Of even more concern was the emergence of new competition from the ultra-low cost carriers (ULCCs) such as Frontier, Spirit, and Allegiant. Similar to what Southwest did in its initial stages, these ULCCs had developed a different sort of disruptively innovative business model, with core revenue coming from ancillary products like hotel and tour packages rather than air tickets. Was Southwest growing too big and ignoring the focus that had made the airline so successful for so long? Would the success saga continue under Kelly when the core elements of the company‘s original strategy—low-cost, organic, and domestic point-to-point short-haul growth and customer-centric culture—were all simultaneously changing? Was this low-cost business model, which put its planes through frequent takeoffs and landings, putting passengers at risk? Would Southwest be able to remain profitable in 2019 and beyond? Teaching Plan The Southwest case is a good example of what a firm has to do to sustain a competitive strategy. It also provides an opportunity to discuss how competitive and growth strategies are chosen and how options are dependent on resources available. Therefore, this case can be positioned in the middle part of the course, just after a discussion of the components of strategic analysis and formulation. For more advanced students, it can also serve as an example of the nuances of strategic implementation. The instructor can also position this case discussion with a sole PRIMARY focus on Chapter 5: Business Level Strategy, contrasting Southwest to the JetBlue and Emirates cases—in discussing choice of competitive strategy, students are encouraged to choose between low-cost leadership and differentiation, but in the airline industry there is really no choice but competition based on TN1-20 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
controlling costs. Although students may try to explain how service amenities and features such as leather seats can create a differentiated advantage, customers rarely are willing to pay a premium for these things. This means the differences between carriers‘ successes often revolve around operational choices and strategic implementation. Uncovering those sometimes subtle differences between airlines can be a challenging yet fruitful discussion. For advanced students, the instructor may wish to assign Michael Porter‘s 1996 article ―What Is Strategy?‖ (Harvard Business Review, November–December, pp. 60–79) as companion reading to the case. Southwest is used as an example in this article of how tight linkages across its value chain activities give it a valuable, rare, inimitable, and non-substitutable competitive advantage. Southwest also demonstrates how human capital can be essential to competitive strategy. The book Nuts!: Southwest Airlines’ Crazy Recipe for Business and Personal Success by Kevin Freiberg and Jackie Frieberg (1996, Bard Press, Austin Texas) will be a useful source in this regard and could be assigned to advanced students as optional reading. ICEBREAKER Because Southwest is well-known for its ―fun‖ activities, even while flying, ask students if they‘ve ever flown Southwest, and whether they had a ―fun‖ experience. Have any of you ever flown Southwest? If so, what was the experience like? Was it fun? How did this differ from other flight experiences you’ve had? Based on this, would you fly Southwest? Many Southwest customers, and maybe some students, are loyal fans of the airline, not so much because of its low-cost, but because of the customer service experience. It might be interesting to students that Southwest does NOT base its competitive strategy on creating this unique customer service culture—the point is not to differentiate itself from its competitors based on how the customer values the experience, but on being able to DELIVER that experience as cheaply as possible—that‘s how Southwest had been able to achieve profitability for 47 straight years! (See its press release from January 2020 http://investors.southwest.com/news-and-events/newsreleases/2020/01-23-2020-112908345.) It‘s also good to reflect back on this discussion when answering the case question about choice of competitive strategy, and the need for Southwest to achieve parity in differentiation. If it can‘t offer in-flight movies and social networking on all flights, or provide a roomy leather seat (the original JetBlue differentiators), Southwest‘s ―fun‖ aspects of travel, from the customer‘s point of view, may be a way for Southwest to achieve this parity. As an optional exercise, regarding Southwest culture as portrayed by founder Herb Kelleher, show students this video of a Southwest Airlines television advertisement from 1988: http://www.youtube.com/watch?v=LcT_VsHqXmU.
TN1-21 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
And this short video clip shows one of the newer specialty-themed planes, the most recent one honoring the state of Louisiana. As of this unveiling in 2018, Southwest had 23 planes with specialty livery: https://www.youtube.com/watch?v=-odCi424eik. And, as an example of how Southwest employees are known for having fun, see this safety announcement video taken by a passenger on a Southwest flight in 2019. https://www.youtube.com/watch?v=1AE_hjOLDtU&t=16s. And a video of diverse Southwest pilots in 2019 explaining why they prefer flying for Southwest. https://www.youtube.com/watch?v=jBgc1IsUrMw. Ask students if the playful sprit of the ―sack‖ ad, the distinctive look of the airplanes, and the obvious appreciation and enjoyment of at least one Southwest employee might make them more or less likely to fly on Southwest Airlines? Why? Some students may also want to talk about horrific airline experiences, especially the April 2018 incident where catastrophic failure of an engine on a Boeing 737-700 caused the death of a passenger on a Southwest flight from LaGuardia to Dallas. The failure occurred when one of the engine‘s 24 titanium alloy fan blades snapped off mid-flight. The violent event caused the front cowling of the engine to disintegrate, firing shrapnel into the cabin of the aircraft. The resulting loss of engine power and depressurization meant the crew had to make an emergency landing in Philadelphia using the plane‘s remaining engine. An initial examination found evidence of metal fatigue at the point where the engine blade failed. This was not the first time. In August 2016, Southwest Airlines Flight 3472, another Boeing 737-700, also suffered an uncontained failure of its left engine that ripped off its front cowling. In this case, shrapnel also pierced the fuselage causing decompression, forcing the flight to make an emergency landing in Pensacola, Florida. No one was injured in that incident. Investigators have determined that the failure was not the result of lax inspections, but rather was based on the design of the engine and the previously unknown stress on the blades, which did not have a mandated age at which to be pulled from service. The engine was manufactured by CFM International, a joint venture of General Electric and France‘s Safran Aircraft Engines. (See https://www.inquirer.com/philly/health/science/southwest-flight-1380-engine-blade-ntsb20181120.html for the full story about the engine blade issue, which is from a common engine, used by some 6,700 aircraft at about 300 different airlines worldwide. The findings of the NTSB investigation could have far-reaching consequences for the airline industry.) Other safety incidents include the July 2009 problem with a Southwest plane (a hole in the fuselage that opened up during flight), and the fuselage hole that appeared in April 2011 (see http://www.bloomberg.com/news/2011-04-25/southwest-jet-with-hole-in-fuselage-hadmisaligned-rivets-u-s-board-says.html ). In addition, Southwest has paid millions over the past decade to settle safety violations, including fines for flying planes that didn't have required repairs (see https://www.chicagotribune.com/business/ct-southwest-airlines-safety-investigation20180424-story.html). TN1-22 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Southwest may have had maintenance incidents, but they also have a very large fleet of planes— more than 700 Boeing 737s, the largest 737 fleet in the world. Southwest Airlines also runs its planes hard. They make many short hops and more trips per day than other U.S. airliners, which adds to the wear and tear on parts, including the engines. This raises questions about whether the company‘s low-cost business model—which puts its planes through frequent takeoffs and landings—is putting passengers at risk. These incidents might make students worried about safety. Explain that this is part of what makes the airline industry such a challenging one. Point out that in 47+ years, up until April 2018, Southwest had never had a passenger or crew fatality, although one person did die on the ground when a Southwest plane skidded off the runway at Chicago‘s Midway airport due to winter conditions in 2005. In 2013, a Southwest plane crash-landed on a runway at New York‘s La Guardia Airport as a result of pilot error. Nine people sustained minor injuries, but the accident seriously damaged the aircraft and delayed traffic at the airport for hours. The captain, who was 49 years old at the time of the incident and had more than 7,500 hours behind the controls of a 737, was fired by Southwest about two months later. The NTSB‘s final report suggested an examination of Southwest‘s training and pilot-oversight programs. See http://www.wsj.com/articles/southwest-airlines-captain-broke-safety-rules-prior-to-2013accident-in-new-york-1415508923 for more information. (These incidents are not in the case.) If the instructor has also assigned the JetBlue case, reference to the general external industry environment and management of human assets is appropriate to make here. NOTE: To get up-to-date news and information about Southwest and various other air carriers, the instructor can visit https://www.travelpulse.com/news/airlines/ and https://www.swamedia.com/releases prior to discussing the case. Finish up the icebreaker exercise by focusing student attention on the issue of operational choices, and how firms, and leadership, need to provide a CONSISTENT customer experience in order to succeed. Before engaging in discussion, you might want to test student‘s basic knowledge regarding the case and the major concepts. Here are some multiple-choice questions to use. (This will get the student‘s attention—they can‘t answer these if they haven‘t read the case!) Southwest uses the following operational model: a. Discount carrier b. Point-to-point c. Hub-and-spoke d. Base of operations ANSWER: b. Yes, Southwest is a discount carrier, but the correct operational designation is ―point-to-point.‖ This is one of the main operational differences between Southwest and many of its competitors. The largest contributors to Southwest‘s expenses are: a. Salaries, wages, and benefits TN1-23 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
b. Jet fuel c. New planes ANSWER: a. Salaries, wages, and benefits were Southwest‘s largest operating costs, accounting for 41% of total operating expenses as of 2019. Jet fuel and oil expenses were the second largest at 22%. As of 2018 Southwest had placed firm orders for 197 of 737 MAX 8 aircraft and 30 of 737 MAX 7 aircraft, but these had not been delivered. Summary of Discussion Questions Here is a list of the suggested discussion questions. You can decide which questions to assign, and also which additional readings or exercises to include to augment each discussion. Refer back to the case objectives table on the first page of these teaching notes to identify any additional readings and/or exercises that can be assigned in advance. 1. PRIMARY QUESTION: Discuss the basis of Southwest‘s competitive advantage and the potential challenges to its strategy. 2. SECONDARY QUESTIONS: What internal resources and assets does Southwest have that may give it a competitive advantage? 3. What are key forces in the general and industry environments that affect Southwest‘s choice of strategy? 4. OPTIONAL QUESTION: What growth strategies might Southwest pursue? 5. OPTIONAL EXPANDED DISCUSSION: Assess the effectiveness of Southwest Airlines‘ leadership, and the use of strategic controls. Discussion Questions and Responses 1. Discuss the basis of Southwest’s competitive advantage and the potential challenges to its strategy. Referencing Chapter 5: Business-Level Strategy How firms compete with each other and how they attain and sustain competitive advantages go to the heart of strategic management. In short, the key issue becomes: Why do some firms outperform others and enjoy such advantages over time? The viability of a firm‘s success is driven by both the internal operations of the firm and the desires and preferences of the market. Firms that succeed have the appropriate resources and cost structure to meet the needs of the industry and general environment. They also have a strategy… A business-level strategy is a strategy designed for a firm or a division of the firm that competes within a single business. Within the firm‘s industry environment generic strategies include basic types of business-level strategies based on breadth of target market (industrywide versus narrowmarket segment) and type of competitive advantage (low-cost versus uniqueness). Here are the three generic strategies that are used to overcome industry forces and achieve a competitive advantage: 1. Overall cost leadership TN1-24 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Low-cost-position relative to a firm‘s peers Manage relationships throughout the entire value chain
2. Differentiation Create products and/or services that are unique and valued Non-price attributes for which customers will pay a premium 3. Focus strategy Narrow product lines, buyer segments, or targeted geographic markets Attain advantages either through differentiation or cost leadership Generic strategies are plotted on two dimensions: competitive advantage and strategic target. The overall cost leadership and differentiation strategies strive to attain advantages industrywide, while focusers have a narrow target market in mind. Both casual observation and research supports the notion that firms that identify with one or more of the forms of competitive advantage outperform those that do not. The strategy that Southwest adopted was overall cost leadership. The company was successful in implementing this low-cost strategy by aligning its structure and systems with the strategy. This low-cost strategy was the reason why the company remained profitable even in the worst of times in its industry. Southwest was the pioneer of ―low-cost, no-frills‖ strategy, using low-wage yet productive employees. In order to succeed, however, Southwest needed to achieve competitive parity on differentiation. As explained in the chapter, competitive parity means a firm‘s achievement of similarity or being ―on par‖ with competitors with respect to low-cost, differentiation, or other strategic product characteristics. Competitive parity on the basis of differentiation permits the cost leader to translate cost advantages directly into higher profits than competitors. Thus, the cost leader earns above-average returns. A business that strives for a low-cost advantage must attain an absolute cost advantage relative to its rivals. This is typically accomplished by offering a no-frills product or service to a broad target market using standardization to derive the greatest benefits from economies of scale and experience. However, such a strategy may fail if the firm is unable to attain parity on important dimensions of differentiation such as quick responses to customer requests for services or design changes. Southwest had been able to offer low-cost services to its customers because it offered no-frills whatsoever. However, in view of the changing competitive scenario, the emergence of competitors such as JetBlue forced Southwest to achieve some degree of competitive parity on differentiation. Companies like JetBlue were at an advantage because differentiation was built into their low-cost model. In the case of Southwest, achieving such parity on differentiation could prove to be expensive and have significant impact on its ability to maintain the low-cost position. The reason why Southwest‘s chief executive officer, Gary C. Kelly, might not have been very keen, initially, on implementing an in-flight entertainment system was because it would be costly for Southwest to have such a system. Southwest‘s ability to balance low-cost and differentiation was important for it to consider into the future. In an attempt at parity, Southwest had finally TN1-25 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
introduced an in-flight entertainment portal with free live and on-demand television, offering 20 live channels and 75 television episodes from popular series. It also introduced Internet access for $8 a day per device on Wi-Fi-enabled aircraft. (In November 2018, Southwest Airlines finally eliminated its $5 fee for in-flight movies, joining other airlines in offering more free entertainment. Southwest, the nation‘s largest domestic carrier, doesn‘t have seat-back screens or overhead screens on its planes. Passengers watch the movies on their smartphones, laptops, tablets, and other Wi-Fi enabled devices. See https://www.usatoday.com/story/travel/flights/2018/11/01/southwest-airlines-freemovies/1844555002/). Here‘s also where the instructor can remind students about the ―fun‖ culture in the air and whether humor can be a differentiating factor. Instructors can ask students if it‘s possible to compete on differentiation in the airline industry. In discussing choice of competitive strategy, students are encouraged to choose between low-cost leadership and differentiation, but in the airline industry there is really no choice but competition based on controlling costs. Although students may try to explain how service amenities and features such as leather seats can create a differentiated advantage, customers rarely are willing to pay a premium for these things. This means the differences between carriers‘ success often revolve around operational choices and strategic implementation. One operational difference that Southwest had made obvious to customers was the decision that ―bags fly free.‖ On the surface this might be seen as a differentiated advantage, but it was actually firmly based in the cost control discipline Southwest had always had: on short-haul flights, which Southwest primarily offered, passengers checked fewer or lighter bags, therefore Southwest incurred no extra fuel demands on these flights. The extra cost most airlines charged for bags was directly based on the higher cost of fuel needed to carry that extra weight. Therefore, what appeared to be a differentiation tactic was actually based on Southwest‘s lowcost strategic choice. A competitive strategy is linked to the value chain, and supported by intangible assets. Southwest had great strengths in its operations and its human capital. Tight links among its activities and assets allowed Southwest to create a service that was unique and valuable to customers. From a resource-based perspective, it was not any single activity but the strong coordination across the various value chain activities (i.e., the tightly linked activity system) that was the source of a sustainable competitive advantage for Southwest Airlines. Let‘s see how that might be so. 2. What internal resources and assets does Southwest have that may give it a competitive advantage? Referencing Chapter 3: Assessing the Internal Environment of the Firm When one firm outperforms others by a wide margin over a long period of time, it‘s important to figure out how this could be. The answer may lie in how that firm arranges its activities and creates unique bundles of resources that allow it to sustain a competitive advantage. Students should assess the relationships between the elements in Southwest‘s value chain. TN1-26 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Remember, value-chain analysis is a strategic analysis of an organization that uses value-creating activities. Value is the amount that buyers are willing to pay for what a firm provides them and is measured by total revenue, a reflection of the price a firm‘s product commands, and the quantity it can sell. A firm is profitable when the value it receives exceeds the total costs involved in creating its product or service. Creating value for buyers that exceeds the costs of production (i.e. margin) is a key concept used in analyzing a firm‘s competitive position. Every activity should add value. Take a look at Exhibit 3.1 to see the value chain activities. Based on the relationships between these elements, Southwest can make a choice of how to proceed to craft a competitive advantage. See the suggestions below: Value chain activity Primary: Inbound logistics (distribution facilities, material control systems, warehouse layouts) Operations (efficient work-flow design, quality control systems) Outbound logistics (consolidation of goods, efficient scheduling, finished goods processing) Marketing and Sales (motivated sales people, innovative advertising and promotion, effective pricing, proper ID of customer segments and distribution channels) Service (ability to solicit customer feedback and respond) Secondary (or support): Procurement (win-win relationships with suppliers, reduced dependence on single supplier) Technology development (state of the art hardware and software, innovative culture and qualified personnel) Human resource management (effective recruitment, incentive and retention mechanisms) General administration (effective planning systems to establish
How does Southwest create value for the customer? Web-based booking gives greater control on managing seat sales. Customers won‘t get bumped. No assigned seating, no meals served, choice of smaller airport—all reduce time and costs. Using only one type of aircraft keeps operational costs low. Less congested airports help create quicker and ontime flight departures. Using its own website for ticketing as a distribution channel. Market segment properly identified, i.e., business travelers flying point-to-point. Effective pricing so far, but may have to start charging fees for extras. Excellent record of communication with customer to keep them informed of changes or inconveniences. Aircraft procurement plan to support growth. Acquisition of AirTran increases bargaining power.
Investments in technology, website fully integrated into operations.
Originally good, relationships starting to erode due to dissatisfaction with union contracts. CEO Gary Kelly was able to continue the strategic vision started by Kelleher. Top management with TN1-27
Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note goals and strategies, access to capital, effective top management communication, relationships with diverse stakeholders)
Case 1: Robin Hood expertise in airline business, ability to coordinate and integrate activities across the value system, and highly visible to inculcate organizational culture, reputation and values. See Southwest Mission Statement, Case Exhibit 2.
Primary Activities In terms of primary activities, the key to Southwest‘s ability to successfully compete in the market appeared to reside primarily in its operations. From the very beginning, Southwest was able to effectively control costs.
Support Activities In regard to support activities, a competitive advantage can be achieved by developing a strong general administration that is built around visionary leadership and a supportive human resource management strategy. Southwest‘s historically positive relationship with its employees was a major strength, as was its well-known sense of fun. But this was starting to erode as the unionized workforce identified inequities between different positions—pilots and flight attendants had different agreements than the mechanics and material specialists—and concerns that the contract didn‘t measure up to the higher historical rates Southwest mechanics earned relative to the rest of the industry, and it did not do enough to compensate members for their industry-leading productivity. Any changes to the contract terms could put an additional burden on Southwest‘s ―low-cost‖ competitive position. In addition, see the concept of the resource-based view of the firm, and the three key types of resources: tangible resources, intangible resources, and organizational capabilities. A firm‘s strengths and capabilities—no matter how unique or impressive—do NOT necessarily lead to a competitive advantage. The resource-based view of the firm takes the perspective that a firms‘ competitive advantages are due to its endowment of strategic resources that are valuable, rare, costly to imitate, and costly to substitute. Without these unique resources, the firm can only attain competitive parity. RBV goes beyond a SWOT analysis to integrate internal and external perspectives in a broader competitive context. RBV can reveal how core competencies embedded in a firm can help it exploit new product and market opportunities. An important issue to focus on here is the importance of intangible resources like innovation and reputation. Especially in mature brands, sustaining reputation is essential. Look at resources that are controlled by Southwest that might enable it to develop and implement value-creating strategies. Based on their reading of the case, students might identify those resources to include: Tangible Resources:
TN1-28 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Financial: Although cost fluctuations in fuel and fees are hard to anticipate, Southwest has historically done an excellent job here, making it the only U.S. airline to be consistently profitable. Physical: New orders for Boeing MAX aircraft, refurbishment of the fleet after the AirTran acquisition might raise questions about financing and increased capital expenditures. Technological: Doesn‘t appear that these resources are any more developed than any other airline with the exception of the new reservation system that could improve flight scheduling and inventory management. Organizational: Historically good relationships with the management hierarchy means there is someone always available to negotiate issues. Intangible Resources: Human: Originally, this was a major strength. Now union troubles, financial, and service concerns might have eroded willingness of employees to step up. Innovation and creativity: Kelleher‘s original idea and vision for the airline was innovative and creative. Kelly appears to be continuing this tradition. Reputation: Southwest enjoys a strong reputation for operational efficiency, although this is starting to slip based on the 2018 rankings. See Case Exhibit 1. (On the WalletHub list of 2019, Southwest ranked 9th out of 12, beat out by Alaskan and Delta, of course. But the airline was also bested by SkyWest, Spirit, and ExpressJet. Part of Southwest‘s low score was because it rated least safe, probably because of the recent death. On the other hand, Southwest had the least customer complaints. See https://www.forbes.com/sites/laurabegleybloom/2019/05/02/rankedthe-best-and-worst-airlines-in-america-in-2019/#4380e3175342). Determining whether the internal resources are valuable, rare, difficult to imitate, or difficult to substitute (VRIN) can help a firm sustain a competitive advantage. See Exhibit 3.6. Applying the VRIN concept, in case of Southwest, an argument may be made that its resources are inimitable. This is because there was some path dependency, causal ambiguity, and social complexity in its operational history. That these elements provided a competitive edge was evident when competitors such as JetBlue had been unable to fully copy Southwest‘s operational model. As has been noted, with its efficient low-cost operations, Southwest had an interlocking system of mutually reinforcing competencies that made its resources simultaneously valuable, rare, inimitable, and non-substitutable, reinforcing its low-cost leadership strategy, thereby providing a competitive advantage. For advanced students, the instructor may wish to assign Michael Porter‘s 1996 article ―What Is Strategy?‖ (Harvard Business Review, November–December, pp. 60–79) as companion reading to the case. Southwest is used as an example in this article of how tight linkages across its value chain activities give it a valuable, rare, inimitable, and non-substitutable competitive advantage. TN1-29 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Referencing Chapter 4: Recognizing a Firm’s Intellectual Assets Although not discussed in the case, Southwest was originally known for its human relations. The human resources department was called the ―People Department‖ to reflect the emphasis placed on its employees, i.e., the human capital. Traditionally, Southwest paid a lot of attention to attracting and retaining human capital, as well as to maintaining its culture. The instructor is encouraged to do his/her own research if training needs to be emphasized. The book Nuts!: Southwest Airlines’ Crazy Recipe for Business and Personal Success by Kevin Freiberg and Jackie Frieberg (1996, Bard Press, Austin Texas) will be a useful source in this regard, and could be assigned to advanced students as optional reading. See the concepts of intellectual capital, human capital and social capital, all of which are intangible assets that a company such as Southwest needs to have in order to compete successfully. Intellectual capital is a measure of the value of a firm‘s intangible assets, its reputation, employee loyalty and commitment, customer relationships, company values, brand names, and the experience and skills of employees. Human capital involves the individual capabilities, knowledge, skills, and experience of the company‘s employees and managers. Social capital is a function of the network of relationships that individuals have throughout the organization. Human capital is the foundation of intellectual capital. Intellectual capital is developed through attracting, developing, and retaining human capital. See Chapter 4, Exhibit 4.2. Southwest was one of those organizations that recognized the importance of both intellectual and human capital for organizational success. The importance it placed on its human capital was clear from the fact that its mission statement made a commitment to its employees of providing a supportive environment. (The instructor can have students read the mission statement in detail at this point, see Case Exhibit 2). Although not discussed in the case, Southwest had been successful in attracting and retaining human capital. Its recruitment philosophy was to ―hire for attitudes, and train for skills.‖ The organization did not compromise on this philosophy even if it meant interviewing several applicants for a low-level job in the organization. The fun culture, reward systems and ―no furlough‖ policy helped retain employees. The culture and rewards created an enhanced identification with the mission and values of the organization, and over the years Southwest experienced less employee turnover rates than its rivals. This had the additional positive effect of reducing costs relative to replacing this human capital. The company‘s employees were more productive than employees at competitor organizations (As indicated earlier, the instructor may refer to Nuts!: Southwest Airlines’ Crazy Recipe for Business and Personal Success by Kevin Freiberg and Jackie Frieberg [1996, Bard Press, Austin Texas] for additional information). Union unrest in recent years was a sign that Southwest‘s lack of attention to labor negotiations had begun to erode employee satisfaction. While Southwest described the pay rates and retirement benefits in the proposed contract as industry leading, union leaders had other opinions. According to the union leaders, the contract didn‘t measure up to the higher historical rates Southwest mechanics earned relative to the rest of the industry, and it did not do enough to TN1-30 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
compensate members for their industry-leading productivity. This illustrated how, in the past, Southwest had been able to increase its intellectual capital, the value of its intangible assets, through its focus on developing human capital, the capabilities of its employees. Attention would now need to be paid to this important resource. Southwest‘s success in retaining its human capital could also be attributed to the nurturing of the ―social ties,‖ or social capital. Although not in the case, in the past there had been great emphasis on teamwork. Employees recognized the contribution and importance of one another‘s work towards the achievement of organizational goals; the ―fun-and-frolic‖ environment, the parties and celebrations, all fostered camaraderie that enriched the social relationships within the organization. Employees felt that they were cared for, were in a family environment. Evidence of this was in the freedom employees felt to be individuals on the job, for example, the funny flight attendants. This had benefits when attracting prospective employees as well, since the extended personal social network could encourage talented people to apply. In 2016, CEO Kelly talked about the culture and how Southwest has never laid off an employee, although hundreds of Southwest workers had protested outside of a shareholder meeting. Some employees said they were ―required to work unreasonably long hours of overtime‖ when the company was short-staffed, according to employee reviews on Glassdoor. Others said that the pay is low. See https://www.cnbc.com/2016/12/09/4-reasons-people-love-working-at-southwestwhich-has-never-laid-off-a-single-employee.html. Through the development of social capital (attracting, developing, and retaining human capital), Southwest increased the value of its intellectual capital, thereby increasing the value of its intangible assets. Not in the case: Although Southwest traditionally had positive relationships with various unions, as of 2015 contract talks with ground crew workers (ramp and ground operations employees) had stalled: The Transport Workers Union Local 555 had been in talks with Southwest since July 2011, but the two sides had been unable to reach a deal. A Southwest representative responded by saying Southwest would continue to actively participate in negotiations by making every effort to reach agreements with unions that are rewarding, flexible, and secure—ones that provide wage and benefit levels that are fair to employees, and allow Southwest to be competitive, and ensure long-term success. See https://www.dallasnews.com/business/airlines/2015/12/18/tensions-rise-between-southwestairlines-and-its-ground-workers-union-over-suspensions/. In addition, from 2017 comes a report of poor working conditions. Union leaders were ready to fight Southwest on working conditions that they say were now entrenched. An antiquated labor relations model designed to drive production, instead was driving morale down across Southwest properties. ―Groundworkers are flagrantly mistreated and abused by management,‖ wrote John Samuelsen, president of the New York-based union that represents 12,000 Southwest groundworkers, as well as 15,000 flight attendants. The letter refers to the ground workers who were members of TWU Local 555. In 2017, Samuelsen said, ―Southwest is writing up nearly three workers per day and firing one worker every other day. The outright hostility to the workforce has obliterated morale, which can only have a negative impact on the passenger TN1-31 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
experience,‖ he wrote. ―The TWU finds it hard to believe that Southwest finds this to be an ideal business model.‖ See https://www.thestreet.com/investing/transport-workers-union-leaderdecries-termination-rate-at-southwest-airlines-14238377. Certainly, resolution of any ongoing unrest in Southwest‘s human capital required attention. 3. What are the key forces in the general and industry environments that affect Southwest’s choice of strategy? Referencing Chapter 2: Analyzing the External Environment of the Firm Organizational leaders must become aware of factors in the overall environment that might affect their ability to create a competitive advantage. So how do managers become environmentally aware? By scanning, monitoring, and gathering competitive intelligence, and using these inputs to develop forecasts. This prepares the firm to do more extensive analysis of the forces in the general environment and the industry or competitive environment. Environmental scanning involves surveillance of a firm‘s external environment to predict environmental changes and detect changes already under way. It is a BIG PICTURE viewpoint of the industry/competition, looking for key indicators of emerging trends—what catches your eye? This alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them. Environmental monitoring is a firm‘s analysis of the external environment that tracks the evolution of environmental trends, sequences of events, or streams of activities. Leaders need to monitor the trends that have the potential to change the competitive landscape—what do you want to track? Firms need to CHOOSE the trends identified via the scanning activity, and regularly monitor or track these specific trends to evaluate the impact of these trends on their strategy process. What factors or trends might be most important to Southwest? To assess how the external environment might affect Southwest‘s strategy, it‘s necessary to take a look at the factors in the general external environment. Southwest must consider the political/legal, economic and global, sociocultural and demographic, and technological forces that might affect the ability of the firm to deliver its service and sustain its business. See which factors in the general environment students might pick that have a significant impact on the airline business. Political-Legal: Under the legal factors, the deregulation of the airline industry in 1978 provided an opportunity to several players to enter the market. It allowed new market segments such as that of the low cost, point-to-point services to emerge. It thus changed the industry landscape. Also, the bankruptcy laws have a significant role to play as they allow even nonprofitable operators to continue in the industry when they are protected. One major change that affected the low-cost carriers such as Southwest was the expiration of the Wright Amendment, allowing airlines operating out of Dallas Love Field, like Southwest, to offer unrestricted nonstop flights to destinations in Texas and elsewhere. TN1-32 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Economic: The airline industry is susceptible to upturns and downturns with the trends in the economy. A growing economy and a booming business mean greater demand for air travel, and a slow-down in the economy means reduced demand, consequent unutilized capacity, and intensified competition. The availability of venture capital, and other capital sources, has an impact on the number of new entrants into the industry. Interest rate fluctuations have an impact on the cost of operations for companies that have high levels of debt. Furthermore, wars with other nations and increases in fuel prices strongly impact the air industry. Sociocultural: The airline industry is highly susceptible to the extreme events such as the September 11, 2001 attacks on the World Trade Center, and publicity surrounding any air accidents such as the one that recently caused a fatality on a Southwest Airlines flight. These create fears in the minds of customers toward air travel and have a severe adverse impact on the industry and on the individual carrier. It also means increased security concerns, delayed flights, increased turnaround times—all these have an impact on customer perception of value, and therefore affect airline profitability. Technological: The Internet and other technological breakthroughs have had an impact on the way the airlines conduct their businesses. For example, most of the low-fare airlines sell tickets directly through their websites rather than through ticket agencies. Customer service is being extended by personnel working from their homes. Online reservations systems like the one implemented by Southwest lead to improvements in flight scheduling and inventory management. All this has made it possible to reduce the costs of operations, making it favorable for the low-cost airlines to operate. Also, customers can now search and compare prices of air tickets much more easily than previously, and this accentuates the price competition. It‘s also necessary to assess the segments of the external competitive environment that include competitors, customers, and suppliers, substitutes and new entrants. Porter‘s five forces model allows strategists to anticipate where the industry might be most vulnerable. Help students apply Porter‘s five forces of competition to the airline industry by drawing a diagram on the board similar to the following, and having students fill in the details:
TN1-33 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Suggested: there are numerous competitors; low switching costs for consumers.
Suppliers’ Power High
Case 1: Robin Hood
Substitutes Threat High
Suggested: the threat of substitutes such as car, limo, bus, train, is high, especially when distances traveled are short.
Rivalry Very High
Buyers’ Power Low
Suggested: there are only two major suppliers: Boeing and Airbus
Suggested: there are low barriers to entry, especially for the low-cost airlines, with low switching costs, therefore a medium threat of new entrants into the industry.
Suggested: buyers are not concentrated; there is no threat of backward integration.
Threat of New Entrants Med-Low
TN1-34 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Based on the external environmental factor analysis, the airline industry has many competitors trying to carve out a piece of the ―profit‖ pie. Here are some details: Threat of new entrants. The extent of threat due to new entrants is determined by how high or low the barriers are to entry into an industry. In the airline industry, deregulation and availability of alternate sources of funding reduced the barriers to entry. Competitors such as ultra-low cost carrier Allegiant Air did not have the expense of a base of operations. They moved their fleet around the country when opportunities were spotted. ULCC flight schedules fitted their fleet availability and not necessarily in timings that were most preferred by customers. Unlike Southwest, the ULCCs were not in the business of connecting people and destinations. The stimulant of demand in the ULCC model was ―fares‖ and not the ―need‖ to get to a destination. Typically, a ULCC entered markets which it thought had latent potential, offered several flights, and then monitored the results. If the expectations about traffic materialized, it offered more services at that airport. If expectations did not materialize or the traffic was less productive than at other points, the ULCC moved out quickly. Economies of scale. This did not work out well for the players in the airline industry. The huband-spoke model developed by the major players led to more of diseconomies of scale than economies. However, the large investments already made by the major airlines and their established networks do pose a significant threat to new entrants unless they counter it with highly efficient operations. Product differentiation. Airlines try to create strong brand identification and customer loyalty by using the frequent flyer programs. When there is strong brand identification, it forces the new entrants to spend heavily on weaning away customers from the existing players, thus discouraging their entry. However, in the airline industry the brand identification has not proved to be so strong as to prevent people from switching to other airlines. Some low-cost players had tried to achieve some product differentiation (e.g., JetBlue providing leather seats, Southwest emphasizing commitment to customer service). However, these are not very strong barriers to entry as the other entrants are imitating them rather easily. Switching costs. There are virtually no switching costs for customers. The frequent flier programs attempt to create switching costs. However, when the customers are presented with low-cost options, there is nothing strong enough that could prevent them from switching to other airlines. Thus, the airline industry faces a high threat of new entrants particularly in the low-cost segment. The barriers can be heightened only when there are ultra-efficient routes or operational routes closely linked across the value chain that competitors find it difficult to copy or imitate. Bargaining power of suppliers is high when 1) there are few suppliers in the industry, 2) there are no easy substitutes to supplier‘s products, 3) when the buyer industry is not an important customer of the supplier group, 4) the supplier‘s product is an important input to the buyer‘s business, 5) the supplier products are differentiated or built up switching costs, 6) or the supplier group poses a credible threat of forward integration. There are only two major suppliers—Boeing and Airbus—to the industry and when the airline trains its pilots on either Boeing or Airbus, TN1-35 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
switching costs are built into the terms of pilots‘ training should the airline decide to change the supplier. Thus, the supplier does enjoy considerable bargaining power. However, there is no credible threat of forward integration by the suppliers such as Boeing or Airbus. Bargaining power of buyers is low as the buyers are not concentrated. While the buyer does not have any switching costs, and there are several choices available, they still lack concentration. The Internet is impacted in increasing the buyer bargaining power because the buyers can compare the prices more easily and in view of no switching costs, they could choose whichever airline offers a low price. Thus, the buyers may be able to influence the airlines to reduce their prices over time. There is no threat of backward integration from the buyers. Threat from substitutes is high when the distances traveled are shorter. In such cases, the customer can choose to travel by land (by car/limo/bus/rail) as they might prove to be cheaper alternatives. However, for longer distances and for more hurried customers, the airlines do not face significant threat from substitute modes of travel. The intensity of rivalry among existing competitors in the airline industry is very high. There are numerous competitors, and in times of low or moderate industry growth, the competition gets fiercer as each one tries to nab customers from the other in order to keep their capacity utilizations at acceptable levels. The exit barriers are high because it is difficult to dispose of grounded planes, as there would be few buyers. Also, due to the bankruptcy laws, even the lossmaking companies might still be around for a long time, thus intensifying competition. So, it is easier to get into the industry, but it might be difficult to get out. The only solution for many companies is to merge, which is why there has been so much consolidation in this industry over the years. (See http://www.investopedia.com/features/industryhandbook/airline.asp#axzz1VjKetXz3 for one source of information on the industry.) Given such a tough industry environment, Southwest should be admired for its ability to not only survive, but, unlike almost all other U.S. carriers, to remain profitable throughout its history, so far. Given that it was now much larger and facing competition in new markets, for instance in the international cities where it was an unknown, could Southwest continue with its excellent track record? Instructors can leave students with this question and possibly move on to discuss other airline cases (JetBlue, Emirates), or can ask students for ideas, and then transition into the following optional discussion. 4. OPTIONAL QUESTION: What growth strategies might Southwest pursue? NOTE: there are no PowerPoint slides to accompany the following. Referencing Chapter 6: Corporate-Level Strategy Southwest was facing growth challenges. Back in 2005, then ex-CEO Kelleher said, ―I think the airline business is fundamentally an opportunistic business. . . . We suddenly have some opportunities materializing that are new to us.‖ Up to that point, most of Southwest‘s growth had TN1-36 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
been organic, that is, it occurred by adding more flights on its existing routes, and by adding more cities. Since then, in addition to its first-ever code share agreement with ATA, CEO Kelly had linked with WestJet at one time, to provide Southwest customers flight bookings into Canada, and had applied for permission to fly Southwest planes to Canadian cities. This was Southwest‘s first attempt to expand outside the United States until its acquisition of AirTran in 2011, which would give it access to coveted gates in Atlanta, GA and flights to Puerto Rico, Mexico, Central America, and the Caribbean. What else could Southwest do to expand? See the concept of diversification. Some possibilities include: Mergers and acquisitions Strategic alliances Joint ventures Internal development Whatever the choice, it should create value for all stakeholders—employees, suppliers, distributors, and the company itself. The choice of diversification strategy should create synergy so that all parties gain something they would not have had on their own. Companies can achieve synergy through diversification in two ways: 1. Through related businesses (horizontal relationships) Sharing tangible resources Sharing intangible resources Leveraging core competencies 2. Or through unrelated businesses (hierarchical relationships) Value creation derives from corporate office Leveraging support activities Core competencies reflect the collective learning in organizations—how to coordinate diverse production skills, integrate multiple streams of technologies, and market diverse products and services to create value. Core competencies must create superior customer value; the different businesses must all have similar elements in the value chain that require similar skills; and these activities or skills must be difficult for competitors to imitate. Southwest‘s core competency was in its operational activities, including the controls it put in place to insure consistency across its business functions. Because of this consistency, Southwest had the potential to diversify into other related service areas if it chose to do so. Sharing activities means that value chain elements are shared across business units, so that two or more activities are done by one of the businesses. This allows for cost savings, but businesses need to make sure to keep control over quality and customer perception. Again, Southwest had an operational activity, which, as already discussed, was one of its strengths. Taking the lessons learned and applying its low-cost strategy to flight operations, Southwest could potentially expand this capability into other areas. From an interview in 2009 (not in the case), Kelly said Southwest was no longer a ―niche‖ player. It could use what it‘s learned over the years to open up a new market quickly and successfully—it was now a tactical question rather than a strategic one, same strategy, just adjusting the tactic to the market. TN1-37 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Southwest could also choose to focus on well-planned strategic alliances or acquisition. Southwest‘s alliances had included the codeshare agreement with Westjet, for flights into Canada (subsequently terminated in 2010), and a codeshare with Mexican carrier Volaris to begin in 2011 (not in the case). These alliances could allow Southwest to expand internationally. (The following is not in the case: The current limitations of the 737 airplane meant Southwest could only travel 3,365 nautical miles without refueling. This meant that only Canada, Mexico, certain destinations in Central America, the Caribbean, Ireland, and England were within reach, although on westbound flights from London‘s Heathrow Airport the aircraft would probably have to stop for fuel.) (Not in the case: Regarding acquisition, in July 2009 Southwest had announced a $113.6 million bid for bankrupt Frontier Airline, formerly based in Denver. Southwest would operate Frontier as a wholly owned subsidiary, and planned to gradually fold Frontier‘s resources into Southwest‘s operating assets—Frontier had Airbus airplanes that would be retired and replaced with Boeing 737s. Frontier‘s employees would have been absorbed into the Southwest culture, but this culture clash proved to be the death of the deal. Southwest employees, specifically the pilots, were concerned about seniority battles, and a Southwest spokesperson said the risk to the culture ―would likely not be worth the reward of marginally better financial performance from the Denver market.‖ See https://lasvegassun.com/news/2009/aug/13/southwest-airlines-bid-frontierstalls-over-disput/ for more details. If approved, this would have been Southwest‘s first major acquisition.) Southwest had established its strategy based on its low-cost operations and unique corporate culture, and had flourished with organic growth, but as opportunities for this kind of growth had disappeared in recent years, Southwest had been forced to rethink this strategy. In September of 2010, Southwest had announced it was acquiring AirTran, formerly known as ValuJet. Although this would give Southwest its desired foothold in Atlanta and flight access to Puerto Rico, Mexico, Central America, and the Caribbean, this acquisition was a major change in Southwest‘s growth strategy. Although the AirTran acquisition would give Southwest flight slots at Atlanta, Charlotte, and Reagan National in the Baltimore-Washington region, as well as additional slots at New York‘s LaGuardia, and access to international destinations, it would also pit Southwest directly against Delta in Atlanta. In addition, Southwest would have to absorb an additional 8,000 employees into its workforce and culture, plus add another type of plane, the Boeing 717, to its maintenance and operational lineup. (Not in the case: However, these planes were being retired and replaced with 737s, and even older 737s were being replaced with newer 737–800s and the newest 737MAX, while some existing 737s were being outfitted with new lighter seats, adding an extra row of seats to the planes in some cases. See http://en.wikipedia.org/wiki/Southwest_Airlines, the Evolve Interior.) Southwest didn‘t have expertise in international operations, so would be depending heavily on AirTran‘s reservation and logistics expertise here. Not in the case: By 2013, AirTran still hadn‘t been fully integrated into all Southwest operations. There were still changes being made to flight schedules, and adaptations being made to service operations at the new destinations. As Gary Kelly said there were ―a lot more new markets under development right now than I think any of us would like. But we want to get this TN1-38 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
transition done obviously and get to a point with the route network that is productive. So if they don‘t perform, we‘ll simply continue to make those adjustments and eliminate the flights that don't perform in lieu of better market opportunities. And what that also ties directly into is that we need to be very mindful of our capacity plans for 2014, and we do have a more cautious outlook for 2014 based on current results.‖ In other words, in the two years since the initial acquisition, the synergies from shared activities expected from the acquisition had not yet been realized. See the 2013 second quarter earning call transcript at https://seekingalpha.com/article/1573732-southwest-airlines-co-luv-management-discusses-q22013-results-earnings-call-transcript?part=single. By the second quarter of 2015 the acquisition of AirTran was complete, and Kelly was announcing a record return on invested capital, with excellent load factors and profit margins, primarily due to continued cost controls. Regarding expansion, Kelly acknowledged there were less opportunities in the United States now, but the new AirTran routes still offered opportunity for development, including in the higher risk international markets. Regarding future growth, Kelly said, ―Southwest Airlines has competitive strength and we want to take forward advantage of those. We‘re a low-cost carrier. We have substantially lower cost than our legacy competitors do. And I think, what people miss is that, we have opportunities to grow that many of our competitors do not and Dallas Love Field is a perfect example of that [adding gates to achieve load factors of 94%]. Houston Hobby International is another perfect example of that [building an international terminal expansion]. So we have not grown Southwest Airlines in three or four years. So we have a history of being prudent and measured and how we approach our business. And certainly, would want to continue that into the future. But we have opportunities to grow like we haven‘t had in years and we absolutely will grow this airline, that is in the best interest of our shareholders.‖ (See https://seekingalpha.com/article/3352505-southwest-airlines-luv-ceogary-kelly-on-q2-2015-results-earnings-call-transcript for details.) The changes over the last six years had been the most drastic in Southwest‘s history. Although it is a known fact that most mergers and acquisitions end up destroying value for the acquiring company‘s shareholders, Southwest had taken its time to manage the AirTran acquisition slowly, and it appeared that the transition had worked. If Southwest‘s growth is going to be driven by international or other route expansion, or by additional M&As going forward, are there enough opportunities left for this growth to be profitable and will it be sustainable? Not in the case: For an interesting overview of Southwest‘s business model, and how it no longer seems to fit any of the three models used among its competitors (Southwest is not ultralow cost like an Allegiant Air or Spirit, nor is it a hybrid like Alaskan Airlines or Jet Blue, and it certainly isn‘t a full-service carrier like Delta/Northwest or United/Continental), see ―Southwest Airlines, the US‘ fourth force, does not neatly fit the emerging US business models‖ at http://centreforaviation.com/analysis/southwest-airlines-the-us-fourth-force-does-not-neatly-fitthe-emerging-us-business-models-101176. Gary Kelly will have to pay close attention to ―shared activities‖ going forward, especially after the planned 2013 merger of American and US Airways will make American Airlines the largest U.S. carrier. TN1-39 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
OPTIONAL EXPANDED DISCUSSION: Assess the effectiveness of Southwest Airlines’ leadership, and the use of strategic controls. Southwest is a great case to use to demonstrate the importance of strategic leadership, and how decisions about how to ―control‖ operational elements can make a great difference in the success of a given strategy. Although not every point is covered in the case, the following is an optional expanded discussion that instructors can use to investigate these issues. For instance, emphasis can be placed on the importance of understanding and managing company culture. See the external web links included below. These can be used to augment the case and expand the information available to decide these issues. Referencing Chapter 11: Strategic Leadership: Creating a Learning Organization and an Ethical Organization In the case of Southwest, as with most companies, implementation issues such as strategic leadership and strategic controls are important for organizational effectiveness. Ask students to discuss how Kelleher and Kelly illustrated the activities of strategic leadership. See the concept of leadership, the process of transforming organizations from what they are to what the leader would have them become. This involves: Setting a direction Designing the organization Nurturing a culture dedicated to excellence and ethical behavior Southwest Airlines had the advantage of strong leadership right from its beginning. The choice of Lamar Muse, an airline veteran who knew the airline business, laid the initial foundation. While Muse was shaping the organization‘s strategy, Herb Kelleher on the other hand, was defending the organization from external regulatory and competitive threats in the courts. Kelleher‘s credibility as a leader was thus established from the very beginning. The three critical activities of strategic leadership—setting the direction, designing the organization and nurturing a culture dedicated to excellence—were well balanced at Southwest and that was an important reason for the success of the organization. Setting direction. As outlined in the case, the direction for Southwest was very clear. It aspired to be a low-cost airline providing point-to-point services. The leadership at Southwest ensured that the organization did not digress from this core business and kept the focus on profitability of operations. However, the importance of providing appropriate direction to employees, while stressing the importance of employee behavior to organizational success, was evident in Southwest‘s mission statement (see Case Exhibit 1.) Organizational design. Herb Kelleher believed in being accessible to the employees to not only maintain their morale but also to ensure that the right information and advice flowed through the organization at the right time. That belief manifested itself in open-communication and an organizational culture that was not bureaucratic. This, however, did not mean that there were no controls. Kelleher ensured that there was tight cost control for the low-cost strategy to be TN1-40 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
successful. (Not in the case: As an example, for a long-time, he personally signed off checks greater than $1,000.) The organization was designed to ensure employee participation at all levels. Employees were made partners in the progress of the firm, and stock options enabled them to share in the company‘s financial success. Thus, Kelleher created a sense of ownership among employees that helped in the implementation of Southwest‘s strategy. Nurturing a culture dedicated to excellence. At Southwest, a culture dedicated to excellence was nurtured by making ―excellence in customer service‖ an explicit goal and aligning the reward systems toward that end. Also, the leadership at Southwest was successful in realizing that in order to have excellent customer service, the organization needed happy and satisfied employees. Therefore, the organization openly committed itself to the fact that ―employees come first.‖ Herb Kelleher, with his personality and style, walked the talk of culture at Southwest. Colleen Barrett, as an important person in nurturing this culture, continued this tradition after Kelleher retired—a sign of a successful leadership transition. Another important aspect to be highlighted is that Kelleher took a very proactive approach toward managing the leadership transition. In 2001, he decided to pass authority into the hands of Colleen Barrett and James Parker, while he still played a role in the strategy process of the organization as the chairman of the board. This gave time for the organization and its people to adapt to the new leaders and thus help smooth the transition. Unfortunately, being a quiet diplomat, James Parker could not fill the gap created by Kelleher‘s departure. Strained by the extensive labor negotiations, Parker resigned as CEO of Southwest in July 2004. Since then, his successor, Gary C. Kelly, has demonstrated he has the energy and enthusiasm to build on Kelleher‘s success in establishing a strong corporate culture and employee loyalty. Although both Kelleher and Barrett had formally retired by 2009, they both remained available to help as needed. NOTE — ADDITIONAL VIDEO INTERVIEWS WITH BARRETT AND KELLY: Colleen Barrett, employee at SWA since 1971 and president from 2001 until stepping down at age 63 in July, 2008, commented on her old boss Herb Kelleher‘s collaborative management style, and how she describes herself as a ―servant leader‖ (a term coined by Robert Greenleaf in the 1950s) in this 25-minute video from Knowledge @ Wharton: http://knowledge.wharton.upenn.edu/article.cfm?articleid=2006. In this video, CEO Gary Kelly talks about the acquisition of AirTran in 2011: http://www.youtube.com/watch?v=5EKybZaPjUA. Would you feel comfortable working for him? If you‘re a shareholder or customer, does his message about the acquisition allay any fears you may have had at the time? Visit the Southwest Airlines website at http://www.southwest.com/html/southwestdifference/southwest-citizenship/index.html and take a look around. Think about what they mean by the ―Southwest Difference.‖ TN1-41 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Then view the video of Southwest CEO Gary Kelly at https://www.youtube.com/watch?v=1tKIt2kRfu0. Southwest Airlines CEO Gary Kelly is a 6'3" Texan who wears jeans and cowboy boots and considers himself "just someone who works in the office." When he flies, he always chooses to sit in the noisiest, most cramped last row of the airplane. Kelly makes sure he remembers employees‘ names and takes time to talk with customers. Kelly came up through the ranks with a rich finance background serving as a former accountant with Arthur Young and Co. and then as CFO (chief financial officer) of SWA. Kelly never had aspirations to become a CEO, but since assuming the position he has helped Southwest maintain its enviable position as the only airline earning profits every year since its founding in 1972. Kelly is credited with locking up fuel hedging contracts, resulting in Southwest paying less for jet fuel than competing airlines. Southwest continues to focus on its founding principles: Keep costs down through fast turnaround time at the gate, try to fly all the same planes (737s) so that parts and maintenance costs are reduced, and treat customers like queens and kings. Oh yes, and one other principle: Treat employees even better than the customers. Do you think Kelly effectively sustains and models the Southwest culture? What traits and skills do you think Kelly possesses that make him an effective leader, an effective strategic manager? Referencing Chapter 9: Strategic Control and Corporate Governance Regarding the importance of strategic controls, students could be asked to identify what difficulties Kelleher and Kelly encountered in balancing rewards, culture, and boundaries. Strategic control involves the process of monitoring and correcting a firm‘s strategy and performance. Students can discuss the differences between a ―traditional‖ and a ―contemporary‖ approach to establishing control systems. In a traditional control system, top management formulates strategies and sets goals. These strategies are implemented, and then performance is measured against the predetermined goals. In a contemporary control system, managers continually monitor both the internal and external environments and identify trends and events that signal the need to revise strategies, goals, and objectives. Students should therefore recognize the importance of involving all levels of operating managers in setting performance goals based on continuous monitoring of the internal and external environment (for instance employee surveys and customer feedback). Because Southwest‘s leadership emphasized employee involvement, Southwest used a contemporary control system to monitor both internal and external environments. Relying on employee and customer feedback, Southwest could make adjustments where needed, and do so in a timely manner. An example of this was evident in Southwest‘s use of company blogs, where dialogue between management, employees, customers, and other interested parties helped identify and resolve important issues. See https://www.southwestaircommunity.com/t5/Blog/bgp/stories. TN1-42 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Strategic control focuses especially on the roles of informational and behavioral control in the formulation and implementation of strategies. See Chapter 9, Exhibit 9.2. Informational control is concerned with whether or not the organization is ―doing the right things,‖ while behavioral control is concerned with whether or not the organization is ―doing things right‖ in the implementation of its strategy. The leadership at Southwest is keenly involved in informational control. The focus on low-cost strategy was so clear that the organization consciously nurtured this by ensuring that it didn‘t diverge from the core business of providing low-cost, point-to-point flight services as an alternative to ground transport. The organization was very conservative in its expansion strategy, i.e., connecting the dots. The company studied the demand conditions of new markets very thoroughly before it decided to enter the markets. Profitability was its prime focus and not just growth. Such an approach helped the company maintain its profitability. Thus, the organization had been effective in ―doing the right things.‖ Chapter 9 emphasizes the importance of aligning both informational and behavioral control systems with organizational strategy. The information gained from the internal and external environment is reviewed against the firm‘s strategy and goals. If the results are not what was expected, then behavioral controls can be utilized to encourage employees to ―do things right‖— employee actions can be influenced through building or maintaining a strong positive culture, creating effective reward and incentive programs, and setting boundaries and constraints to minimize improper and unethical conduct (see Chapter 9, Exhibit 9.3). Regarding behavioral controls, Southwest had been lucky, in a way, for having faced a survival crisis in the initial years. The threat to survival helped forge the original ―Southwest spirit‖ or the underdog warrior mentality. That formed the basis of Southwest‘s culture. Southwest had recognized the importance of a culture that focused on excellence in customer service and that valued employees who could foster such customer service. The culture had thrived on openness, communication, fun, and celebration that kept employees happy and motivated, as well as helping them deliver excellent customer service. Storytelling and pep talks by top executives were used effectively to reinforce such culture. Stories of Southwest employees going out of their way to help customers were given wide publicity by featuring such employees as the ―Star of the month‖ in their Spirit magazine. Top executives used such stories to help reinforce the importance placed on such behaviors. As for pep talks, Herb Kelleher would personally step in at times of difficulty to keep up the employees‘ motivation and morale. The organization had used a personal touch to communicate to employees that it cared for them. This included, among others, sending birthday cards signed by Colleen Barrett, helping employees cope with any personal crises, and also recognizing their contributions and honoring them. The emphasis on teams and appreciation of one another‘s efforts towards organizational goals came in the form of employee recognition programs where members from one department took over others‘ duties for a day and honored them. There was a ―culture committee‖ to take care of these aspects. See https://www.youtube.com/watch?v=SC1OA5jELTs Creating such a strong culture, decreased the need for boundaries and close monitoring. However, the intensified competition, further growth, and labor restructuring agreements among other airlines were making it very difficult for Southwest to maintain this strong, employee-centered culture. TN1-43 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Another component of behavioral control is motivating with rewards and incentives. At Southwest, rewards were directly linked to contribution to bottom line. By giving employees a share in the profits, stock option plans, etc., Southwest effectively made employees responsible for the company‘s, and their own, fortunes. Employees‘ goals were closely aligned with that of the company and they exercised close control on costs and operational excellence so that they gained from sharing the bounty. A ―no furlough‖ policy that gave job security further helped in making employees work for less as compared to the wages at competitive organizations, and helped in the implementation of the low-cost strategy. The third component is boundaries. At Southwest, there were no elaborate rules and regulations. The principle of business was to keep it simple. Cost control, focus on core operations, valuing customers and employees were the fundamentals. This did not mean a lack of control. By making employees a part of its strategy, the company exercised effective control with minimal rules and regulations. With the balancing of informational and behavioral controls, the organization succeeded in exercising effective strategic control. Southwest experienced loyalty of its employees, evidenced by reduced employee turnover rates, even during the downturn in the industry. The effective strategic controls were further reflected in Southwest‘s continued profitability. This chapter discusses the importance of a strong, positive culture and reward systems that rely more on achievement of jointly created and internalized goals and objectives than on constraints imposed by rules and regulations. Behavioral controls involve a system of rewards and incentives coupled with a strong culture. Managers need to understand the need to hire the right people, that training plays a key role, managerial role models are vital, and reward systems need to be clearly aligned with organizational goals and objectives. An organization can get into problems when it uses one component of behavioral control as a substitute for the other. In case of Southwest, some problems with employees existed because, in the changed circumstances, the employees believed that Southwest was trying to substitute culture for rewards (we‘re such a wonderful place you should be willing to make any sacrifice to keep it this way). Southwest would need to devise an effective response to this concern. Southwest‘s example demonstrates clearly that these three levers—culture, rewards, and boundaries—need to be effectively balanced, and that one lever of control cannot take the place of another. While a strong organizational culture can help substitute for other forms such as rewards or boundaries, organizations can get into problems when they try to substitute culture completely for rewards. Instead, rewards and incentives need to be coupled with a strong culture. The Southwest example demonstrates how difficult it is to balance these elements. NOTE — ADDITIONAL READING, VIDEO INTERVIEWS, COMMERCIALS: The price-earnings ratio (P/E) reflects the cost of a company‘s stock relative to its earnings per share. A lower ratio is thought to reflect more of a bargain. Compare Southwest‘s price-earnings ratio to that of its direct competitors and the industry as a whole using this link: http://finance.yahoo.com/q/co?s=LUV TN1-44 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
How does Southwest compare to the competitors listed? Here‘s more information on the AirTran acquisition: http://www.bloomberg.com/news/2010-0927/southwest-airlines-agrees-to-buy-airtran-for-1-4-billion-in-cash-shares.html And a summary of the three major challenges facing Southwest: operating a multi-aircraft fleet, serving international destinations, attracting more business travelers, at least in the Northeast: https://seekingalpha.com/article/227366-airtran-acquisition-offers-glimpse-of-a-new-southwest On the announcement of a profitable quarter in July of 2013, in this video, CEO Gary Kelly talked again about how Southwest could remain profitable in the future, and was asked about whether he would consider adding bag fees to become more competitive—which he will not consider doing at this time. He also commented on how almost all other airlines have had to declare bankruptcy in order to survive, or have expanded through consolidation/mergers or acquisitions. Southwest, however, continues to be profitable: http://video.foxbusiness.com/v/2566005512001/southwest-ceo-on-earnings-added-baggagefees/. Southwest is famous for using hedging to try to lock in energy savings. United/Continental and AMR (American Airlines) have also been successful here. The industry issue, trying to move revenues along in the face of a difficult economic environment—consumer travel spending down—affects Southwest as well as anyone else. Kelly suggests that the Southwest‘s brand and its culture are some of those rare and inimitable assets that sets his airline apart. Do you agree with his comments? Southwest has several operational differences from other airlines. Currently, SWA does not charge fees for the first or second bag checked, one of the only airlines with no fees. Another operational difference is the concept of ―open seating‖ where customers are not assigned seats, but can choose their favorite seating location once on the airplane. In 2006, customers challenged Southwest to improve the way it handled boarding. By 2013, Southwest had changed this to allow customers to choose their seats by being the first to board—which they could elect to do, for a fee! However, the point is that Southwest DID appear to listen to its customers‘ feedback. See the Southwest blog https://www.southwestaircommunity.com/. CEO Gary Kelly commented that he wished to do two things: improve the customer experience and increase customer productivity. Do you think he will be able to do both? And will this sustain Southwest‘s differentiated competitive advantage in this area? Regarding Southwest culture as portrayed by founder Herb Kelleher, watch this video of a Southwest Airlines television advertisement from 1988: http://www.youtube.com/watch?v=LcT_VsHqXmU. And this short video clip shows one of the newer ―specialty‖ themed planes, the most recent one honoring the state of Louisiana. As of this unveiling in 2018, Southwest had 23 planes with specialty livery: https://www.youtube.com/watch?v=-odCi424eik. And, as an example of how Southwest employees are known for having fun, see this safety announcement video taken by a passenger on a Southwest flight in 2019. TN1-45 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
https://www.youtube.com/watch?v=1AE_hjOLDtU&t=16s. And a video of diverse Southwest pilots in 2019 explaining why they prefer flying for Southwest. https://www.youtube.com/watch?v=jBgc1IsUrMw. Would the playful sprit of the ―sack‖ ad, the distinctive look of the airplanes, and the obvious appreciation and enjoyment of at least one Southwest employee might make them more or less likely to fly on Southwest Airlines? Why? Read this article about the emergence of another low-cost airline, Independence Air: http://money.cnn.com/2004/06/09/news/midcaps/independenceair/index.htm and then the further history of Independence Air, including its bankruptcy announcement in January 2006 after only two years of service: http://en.wikipedia.org/wiki/Independence_Air. Another low-cost no-frills airline that HAS been successful is Allegiant Air. This small airline operates scheduled and chartered flights from small towns to vacation destinations such as Las Vegas, lowering costs by flying used aircraft with minimal staff, and charges fees in flight for things like food and beverages, souvenirs, and bookings partnerships with hotels, car rental companies, and tourist attractions at its destinations. For more information on this airline‘s business model, see http://en.wikipedia.org/wiki/Allegiant_Air. Since it is fairly easy for an airline to start up, how serious of a threat are newer discount airlines such as JetBlue to Southwest Airlines? What steps, if any, should Southwest executives take to combat this threat? References Freiberg, K & Freiberg J. 1996. Nuts!: Southwest Airlines’ Crazy Recipe for Business and Personal Success. Austin, TX: Bard Press. Porter, M.E. 1996. ―What Is Strategy?‖ Harvard Business Review, 74(6): 61–78. Teaching Note Case 4 — Zynga: Is the Game Over? Case Objectives 1. To investigate how human capital assets can be used to craft a strategic advantage. 2. To examine the role of strategic controls and leadership in implementing strategy. See the table below to determine where to use this case: NOTE: There are both PRIMARY and SECONDARY chapters that can be used for this case. The Teaching Note gives guidance for the PRIMARY use chapters and provides suggestions if the instructor wants to use the case to illustrate concepts from the optional SECONDARY chapters. TN1-46 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
CASE OBJECTIVES TABLE Chapter Use Key Concepts PRIMARY CONCEPTS 4: Intellectual Assets 8: Entrepreneurial Strategies 9: Strategic Control 11: Strategic Leadership SECONDARY CONCEPTS 5: Business Level Strategy 12: Managing Innovation
Intellectual and human capital; dynamic capabilities Opportunity recognition
Additional Reading and/or Exercises NOTE web links NOTE web links
Informational vs. behavioral control Leadership; learning NOTE updated news, video organization; ethical orientation Competitive strategy; generic strategies
Innovation; scope of innovation; entrepreneurial orientation (optional)
NOTE optional advanced reading, Lumpkin & Dess, 1996
Case Synopsis Zynga, incorporated in 2007 and located in San Francisco, California, had become a dominant player in the online gaming field, almost entirely through the use of social media platforms. Games like FarmVille, Words With Friends, and Texas HoldEm Poker had been among the most popular games on Facebook. To exemplify Zynga‘s prominence, Facebook was reported to have earned roughly 12 percent of its 2011 revenue from the operations of Zynga‘s virtual merchandise sales. Zynga had been a dominant force but lost market share in recent years due to the absence of an innovative product pipeline. Lack of new product-driven growth had led to uneven revenues, with significant losses—over $108 million in 2016. Even though Zynga made some strong acquisitions, this was not enough to completely reverse declines from the existing product lineup, and 2018 ended with a net income of only $15 million. Zynga‘s long-term viability had been put at risk because of questionable decision making. Many of Zynga‘s competitors, and even some partners, had been displeased with the company‘s actions and had shown it in the form of litigation. Agincourt, a plaintiff of a lawsuit brought against Zynga, was quoted as saying, ―Zynga‘s remarkable growth has not been driven by its own ingenuity. Rather it has been widely reported that Zynga‘s business model is to copy creative ideas and game designs from other game developers and then use its market power to bulldoze the games‘ originators.‖ Zynga had been accused of copyright infringement, breach of written contract, and, internally, it had a reputation for a risk-averse company culture that failed to reward innovation and creativity. Regarding its users, complaint resolution consisted of emailonly support, and there was concern that customer information was not being properly protected against unauthorized access. TN1-47 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
To make matters worse, Zynga had had four CEO changes since 2013, with the most recent one, Frank Gibeau from Electronic Arts, installed in March of 2016, now expected to turn the company around. Although Zynga had once been a dominant force on Facebook, by 2019 it had only one game, Texas HoldEm Poker, in the top five virtual-gaming rankings, with users increasingly choosing to play King Company‘s Candy Crush Saga and others. As Zynga looks to its optimistic future, where will its next big hit come from? With all the criticism aimed at Zynga‘s past behavior, will the company be able to change its approach, acquiring new titles and rights, developing new games and showing its capabilities as a leader in the industry rather than a follower? Teaching Plan The Zynga case is a good example of the role of entrepreneurship in maintaining the pace of innovation within an industry with a volatile product life cycle. This case can be used toward the end of the semester to review strategy formulation and implementation in a fast-moving environment. Used to encourage more advanced analysis among exceptional students, the instructor may suggest possible external research sources, and possible supplemental assigned reading. It may be especially interesting to initiate a discussion among advanced students to consider the lengths to which an entrepreneur might go to establish and maintain a competitive advantage by assigning Lumpkin & Dess‘s 1996 ―Clarifying the entrepreneurial orientation construct.‖ This can help students get a fuller picture of the challenges facing Zynga‘s leadership. ICEBREAKER It‘s possible that some students might have been enticed to play Zynga‘s Farmville, Words with Friends or other games as part of their Facebook activities. If so, students may be able to comment on how these online games attract users, and how the gaming companies might be able to make money from this activity. It might be interesting to ask the following: How many of you have played Farmville, Words with Friends, Zynga Poker or any other online game? What is the attraction? How many of you have spent actual money on virtual merchandise? Why? The answers to these questions can provide insight into Zynga‘s strategy, especially its business model. The instructor can also visit Zynga‘s website at http://zynga.com/ to show students how the company markets its products, or visit http://investor.zynga.com/ to learn more about the company, including news, career opportunities, and investor relations. Summary of Discussion Questions Below is a list of the suggested discussion questions. You can decide which questions to assign, and also which additional readings or exercises to include to augment each discussion. Refer TN1-48 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
back to the Case Objectives Table at the beginning of this Teaching Note to identify any additional readings and/or exercises so they can be assigned in advance. 1. What internal resources and assets does Zynga have that may give it a competitive advantage? 2. What issues did Zynga face in formulating its initial strategy? 3. What challenges did Zynga face as it implemented strategy, and what choices does leadership have to make now in order to attain and sustain a competitive advantage? 4. OPTIONAL QUESTION: How did Zynga choose to compete and what innovation is left for it to pursue? Discussion Questions and Responses 1. What internal resources and assets does Zynga have that may give it a competitive advantage? To start with, the instructor might want to position the discussion by reviewing what strategic management really is: Referencing Chapter 1: Strategic Management Strategy is all about the ideas, decisions, and actions that enable a firm to succeed. See Chapter 1, Exhibit 1.1: Strategic management consists of the analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages: ● strategy directs the organization toward overall goals and objectives ● includes multiple stakeholders in decision making ● need to incorporate both short-term and long-term perspectives ● recognizes tradeoffs between efficiency (cost) and effectiveness (performance) Leaders face a large number of complex challenges. Leaders must be proactive, anticipate change, and continually refine changes to their strategies. This requires a certain level of ―ambidextrous behavior,‖ where leaders are alert to opportunities beyond the confines of their own jobs and are also cooperative and seek out opportunities to combine their efforts with others. Leaders must make strategic management both a process and a way of thinking throughout the organization. The basic question strategic management tries to answer is: How can we create competitive advantages in the marketplace that are not only unique and valuable but also difficult for competitors to copy or substitute? When formulating strategy, a decision must be made about the firm‘s strengths and capabilities—what assets does the firm have that can help it create this competitive advantage? These assets can reside in tangible resources such as the components of the firm‘s operations and infrastructure, or there can be intangible assets that help the firm create dynamic capabilities to support its choice of competitive strategy. TN1-49 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Referencing Chapter 4: Recognizing a Firm’s Intellectual Assets See the concepts of intellectual capital, human capital and social capital, all of which are intangible assets that a company such as Zynga needs to have in order to compete successfully. Intellectual capital is a measure of the value of a firm‘s intangible assets, its reputation, employee loyalty and commitment, customer relationships, company values, brand names, and the experience and skills of employees. How do companies create value in a knowledge— intensive economy? The general answer is to attract and leverage human capital (intangible assets) effectively through mechanisms that create products and services of value over time. Human capital involves the individual capabilities, knowledge, skills, and experience of the company‘s employees and managers. This knowledge is relevant to the task at hand, as is the capacity to add to this reservoir of knowledge, skills, and experience through learning. Human capital is the foundation of intellectual capital. Intellectual capital is developed through attracting, developing, and retaining human capital. See Chapter 4, Exhibit 4.2. Success in retaining human capital could also be attributed to the nurturing of the ―social ties‖ or social capital. Social capital is a function of the network of relationships that individuals have throughout the organization and beyond. Relationships are critical in sharing and leveraging knowledge and in acquiring resources. Social capital can extend beyond the organizational boundaries to include relationships between the firm and its suppliers, customers, and alliance partners. If employees are working effectively in teams, across business divisions, and sharing their knowledge and learning from each other, not only will they be more likely to add value to the firm, but they also will be less likely to leave the organization. Dynamic capabilities involve a firm‘s capacity to build and protect a competitive advantage, which rests on knowledge, assets, competencies, complementary assets, and technologies. Dynamic capabilities include the ability to sense and seize new opportunities, generate new knowledge, and reconfigure existing assets and capabilities. These capabilities are related to the entrepreneurial side of the firm and are built within a firm through its environmental and technological sensing apparatus, its choices of organizational form, and its collective ability to strategize. Dynamic capabilities are about the ability of an organization to challenge the conventional wisdom within its industry and market, learn and innovate, adapt to the changing world, and continuously adopt new ways to serve the evolving needs of the market. Intellectual assets or intangible resources are critical to organizational success. The growing importance of knowledge, coupled with the move by labor markets to reward knowledge work, tells us that investing in a company is, in essence, buying a set of talents, capabilities, skills, and ideas—intellectual capital—not physical and financial resources. Here are some questions organizations should ask. Human capital: does the organization effectively attract, develop, and retain talent? Does the organization value diversity? Social capital: does the organization have positive personal and professional relationships among employees and alliance partners?
TN1-50 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Technology: does the organization effectively use technology to transfer best practices across the organization, codify knowledge, and develop dynamic capabilities for competitive advantage? Presence of Organizational Capabilities/Specific Competencies or Skills: Developing social capital through relationships with alliance partners: Zynga was one of the first companies to partner with Facebook in developing online games. With Facebook as an alliance partner, Zynga‘s social capital grew through the participation of Facebook users, and this partnership and participation led to a substantial portion of Zynga‘s profits. Attracting, developing and retaining human capital: Initially, Zynga seemed to be able to take advantage of the newfound ―abundance of software developers.‖ Probably these developers were eager to investigate the creative possibilities of the social network environment, but it appears then CEO Pincus did not appreciate this creativity, instead telling his employees to ―just copy‖ what others did. This approach could not lead to retention of talented employees who wanted to exercise their creativity. This implies that the initial human capital advantage would not be sustainable. However, there is still an ―abundance‖ of software developers, so new hires or contractors are probably easy to find. Dynamic capabilities: Since dynamic capabilities are derived from the ability to learn, innovate and adapt to changing conditions using technology, existing competencies and assets, it‘s unlikely Zynga will be able to see any real competitive advantage here. Although the technology is there, it didn‘t appear to originate with Zynga, and the historic reluctance of Pincus to ―attempt a new idea that didn‘t fit the ‗tired-and-true‘ mold of other successes‖ meant any real new opportunities might have been missed. This might have changed under Frank Gibeau‘s leadership. CEO since 2016, Gibeau has shown an ability to locate potentially lucrative properties for acquisition, and the announcement of a multi-year agreement with Disney to develop a mobile Star Wars game speaks to Gibeau‘s negotiating skills and his ability to adapt to changing conditions. Intellectual capital: Since intellectual capital comes from reputation, employee loyalty and commitment, customer relationships, company values, brand names, and the experience and skills of employees, Zynga doesn‘t appear to have much to show here. The reputation of the company has suffered because of the recurring concerns over intellectual property violations, and potential lack of safeguards surrounding consumer information. Employee loyalty and commitment are suspect because of Pincus‘ poor past support for creativity and initiative—why would anyone want to stick around in a company that was known for ―bulldoze‖ tactics? Therefore, there was no opportunity to learn from the accumulated experience and skills that resided in talented employees. Again, Pincus‘ actions spoke to the company‘s values (or lack thereof), which were also reflected in its relationships with customers—there was no access to support staff when customers needed service. All this implies that the company brand could be considered tarnished, resulting in not only a loss of intellectual capital, but financial capital as well, in the form of dissatisfied shareholders! New CEO Frank Gibeau was trying to put Zynga on the comeback trail but might still face resistance from multiple stakeholders. TN1-51 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
NOTE — ADDITIONAL WEB LINKS: Regarding intellectual capital, here‘s an article about the quote attributed to Mark Pincus, ―I don‘t f***ing want innovation. ―You‘re not smarter than your competitor. Just copy what they do and do it until you get their numbers.‖ This story from 2012 talks about Zynga‘s copycat strategy, and quotes Pincus justifying the company‘s actions by pointing out, ―Google didn‘t create the first search engine. Apple didn‘t create the first mp3 player or tablet. And, Facebook didn‘t create the first social network. But these companies have evolved products and categories in revolutionary ways. They are all internet treasures because they all have specific and broad missions to change the world. We don‘t need to be first to market. We need to be the best in market. There are genres that we‘re going to enter because we know our players are interested in them and because we want and need to be where players are. We evolve genres by making games free, social, accessible and highest quality. … [Farmville, CityVille, Words with Friends], none of these games were the first to market in their category but we made them the most fun and social, and the most popular. Our teams continue to build and improve these games every week which has been an important part of our success model. We run our games as a live service and we continue to iterate, innovate and improve on them to give our players the best possible experience.‖ However, this article‘s author doesn‘t buy it— ―Yes, every product and IP on the market is generally a derivative of some other concept in almost all cases, but what Zynga‘s doing is a step beyond. The company scavenges through the most popular titles on the social market and harvests them for their own…. Pincus would have us believe he‘s just continuing in the great tradition of all tech pioneers, drawing on past products to make future ones, but there‘s something different with Zynga. Something wrong. And to have a brand that is this creatively bankrupt does not bode well for its long term prospects.‖ See https://www.reddit.com/r/gamingnews/comments/p7s8y/leaked_zynga_memo_justifies_copycat _strategy/ and click on the header ―Leaked Zynga Memo Justifies Copycat Strategy.‖
TN1-52 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
2. What issues did Zynga face in formulating its initial strategy? Referencing Chapter 8: Entrepreneurial Strategy and Competitive Dynamics When formulating strategy, entrepreneurship involves the creation of new value by an existing organization or new venture that involves the assumption of risk. For an entrepreneurial venture to create new value, three factors must be present—an entrepreneurial opportunity, the resources to pursue the opportunity, and an entrepreneur or entrepreneurial team willing and able to undertake the opportunity. Entrepreneurs must go through a process of identifying, selecting, and developing potential opportunities. See Chapter 8, Exhibit 8.1 and the opportunity analysis framework: the relationship between an entrepreneur, the firm‘s resources, and the opportunities available in the firm‘s environment. Entrepreneurs need to understand the concept of opportunity recognition: the process of discovering and evaluating changes in the business environment, such as a new technology, socio-cultural trends, or shifts in consumer demand, that can be exploited. Changes in the external environment can lead to new business creation, but the discovery of these new ideas is not enough. They then need to be evaluated to find out if they‘re strong enough to become new ventures. Good entrepreneurial opportunities are those that are attractive to the marketplace (there must be demand for the new product or service), achievable (it must be practical and physically possible to do), durable (the window of opportunity must be open long enough for it to have a chance for success), and value creating (it must be profitable—the benefits must surpass the cost of development by a significant margin). Resources are an essential component of a successful entrepreneurial launch. The most important resource is usually money, but human resources, strong and skilled management, is also an essential asset. Social capital, or entrepreneurs who have extensive social networks or wellconnected key contacts, allows the new venture to gain exposure and build legitimacy faster. Strategic alliances represent a type of social capital that can be especially important to young and small firms. Launching a competitive venture requires a special kind of leadership involving courage, belief in one‘s convictions, and having the energy to work hard. Three characteristics of entrepreneurial leaders are: ● Vision ● Dedication and drive ● Commitment to excellence To achieve excellence, venture founders must understand the customer, provide quality products and services, pay attention to details, continuously learn, and surround themselves with good people. With Mark Pincus as the founding entrepreneur, the competitive advantage offered by the resources he acquired and developed, and the opportunities present in the external environment, how did Zynga exploit those factors to achieve a sustainable competitive advantage? Certainly Pincus saw an opportunity based on the growth of social networking, and he tested his skills via TN1-53 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
his initial startups, Freeloader and Tribe.net. As with most entrepreneurs, he exhibited vision, drive, and dedication. He also seemed to utilize his social capital to form a strategic alliance with Facebook and attract the initial human capital needed in order to develop the games. However, as previously stated, this human capital did not appear to be retained in a way that might benefit the firm as it grew. Therefore, some key resources, in the form of human resources, might not be available to Zynga as it tried to implement future strategies. Although the new venture took advantage of an opportunity where there was demand (the interest in easily accessible, fun, and interactive online games), where the product development was easily achievable (talented individuals could write code in the newly available Facebook environment), where the demand was durable (Facebook membership was growing), and where the opportunity was value-creating (Farmville generated a lot of profit from sale of virtual merchandise), there was no real commitment to excellence, except in making games that made money. This element of entrepreneurial leadership seemed lacking, at least in the person of Mark Pincus. New entry into markets, whether by start-ups or by incumbent firms, nearly always threatens existing competitors. This will likely provoke a competitive response. Competitive dynamics— intense rivalry among similar competitors—has the potential to alter a company‘s strategy. New entrants may be forced to change their strategies or develop new ones to survive competitive challenges by incumbent rivals. Companies launch competitive responses to: ● Improve market position ● Capitalize on growing demand ● Expand production capacity ● Provide an innovative new solution ● Obtain first mover advantages When Zynga began, it obtained a first mover advantage. However, the firm was unable to protect that advantage. Certainly the online gaming industry creates very few barriers to entry for new competitors, but sustainable growth may be difficult without additional innovation. Zynga appeared to copy the innovation of others rather than develop any itself. Resources, especially human ones, appeared to be available, but financial resources might be lacking too—which is probably why firms such as GameHouse and Playfish allowed themselves to be acquired by others. Zynga is a public firm, which limits expansion except through internal development, or perhaps Zynga might try more acquisitions or seek out buyout offers itself. In any event, its entrepreneurial strategy appeared to be at a standstill, until CEO Gibeau came aboard. NOTE – ADDITIONAL WEB LINKS: As of 2011 Zynga had made 14 acquisitions, many of which were dubbed ―acqui-hires,‖ acquisitions of only a company's team and not its assets. See http://mashable.com/2011/05/18/zynga-dna-games/. One more recent acquisition, of Spooky Cool Labs in June 2013, brought talent in the person of Joe Kaminkow, who brought a ―vast knowledge of real money gaming‖ to Zynga. As the analyst says, ―Who better to design online slot games based on Zynga games than one of the most recognizable names in the history of slots? Kaminkow holds patents and contacts that will help Zynga get a leg up on the TN1-54 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
competition.‖ See https://seekingalpha.com/article/1528402-zyngas-latest-acquisition-of-spookycool-labs-all-about-talent. This came after Zynga shut down the acquisition it made in 2012, OMGPOP, which Zynga had acquired in order to get the game Draw Something. According to this article, the game quickly lost users ―shortly after the Zynga acquisition. The game might have been a huge hit for the first couple of weeks, but as with a lot of games, they start to lose their lasting appeal after a while, and that‘s probably what happened with Draw Something.‖ This illustrates how acquisitions need to be carefully assessed for their durability and ability to generate profit instead of just adding cost. See http://www.slashgear.com/zyngas-omgpop-studio-shut-down-14-months-afteracquisition-04284917/. Zynga also tried to develop something in the online gambling market (real money gaming) by filing an application for a Nevada gaming license in December 2012. The company started offering online gambling in the U.K. in April 2013, but by July 2013 Zynga ―made the focus choice‖ not to pursue online gambling in the United States. See http://money.cnn.com/2013/07/26/technology/zynga-online-gambling/index.html. After Frank Gibeau became CEO in 2016, he embarked on a quest to bring the company back from the ―long descent into insignificance into which once-mighty tech businesses sometimes stagger.‖ He did this by looking at the financial picture, selling the company‘s ―cavernous‖ headquarters for $580 million and raising money through a convertible debt offering. He also renegotiated acquisition deals, making payouts contingent on hitting profit targets rather than just revenue. These new deals allowed Gibeau to build cash, making it possible to make thoughtful future acquisitions. See https://www.theinformation.com/articles/zynga-no-longer-a-game-hasbeen-hunts-for-acquisitions An article from 2020 confirms that Gibeau‘s turnaround strategy may be working; Gibeau seems to have reinvented Zynga. It now makes only a sliver of its money from Facebook-based games, which had given the company a poor reputation for delivering endless requests and notifications to social media users. Instead, Zynga now focuses on stand-alone titles that consumers play on their phones. They include Words With Friends, Zynga Poker, and Merge Dragons!, which lets players combine dragon eggs and treasures to produce skills and objects. Acquisitions of smaller firms such as Small Giant Games and Gram games, and potential investments in licensing for titles such as Harry Potter and Star Wars, means Zynga might have content it can develop for multiple platforms, not just Facebook. In addition, Gibeau has succeeded at a turnaround of company culture: ―Frank and his management just reset the culture and what the market perceives Zynga to be. You stop worrying about losing your job and start getting excited about the bonus you make because you‘ve hit your goals. That‘s the biggest step in a turnaround.‖ See https://www.bloomberg.com/news/articles/2020-01-03/zynga-is-booming-again-afterwilderness-years-at-farmville-maker. In an article from 2019, Gibeau talks about how Zynga is focusing on mobile, and is using a new criteria for choosing games: ―When we greenlight new games, like the nine games we‘ve been talking about, we look at the potential in each game and ask ourselves, ―Can this last for five years or more? Does it reach a global audience? Does it have a potential to do more than $100 TN1-55 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
million in a year?‖ Maybe not the first year, because in mobile you have to grow into it, but it‘s definitely not a buzzword. We use it as a decision-making point to classify the games and the investments we make at Zynga.‖ Gibeau also notes that he‘s sourcing talent from international sources: ―We‘ve been growing internationally, because mobile has so much talent in terms of developers and franchises everywhere.‖ See more at https://venturebeat.com/2020/02/23/nomans-sky-adds-living-ships-and-vr-improvements/. See financial news about Zynga (ZNGA) at http://finance.yahoo.com/q?s=ZNGA, and visit the company‘s Web site at http://zynga.com/ to see the current game offerings. Visit http://investor.zynga.com/ to find out more about the business.
3. What challenges did Zynga face as it implemented strategy, and what choices does leadership have to make now in order to attain and sustain a competitive advantage? Referencing Chapter 9: Strategic Control and Corporate Governance Once strategy is formulated, the firm must implement it and monitor its effectiveness. Strategic control involves the process of monitoring and correcting a firm‘s strategy and performance. In a traditional control system, top management formulates strategies and sets goals. These strategies are implemented, and then performance is measured against the predetermined goals. In a contemporary control system, managers continually monitor both the internal and external environments, and identify trends and events that signal the need to revise strategies, goals and objectives. The relationships between strategy formulation, implementation, and control are highly interactive. This approach utilizes two different types of strategic control: informational control and behavioral control. These two types of control play a role in the formulation and implementation of strategies. Informational control is a method of organizational control in which a firm gathers and analyzes information from the internal and external environment in order to obtain the best fit between the organization‘s goals and strategies and the strategic environment. Behavioral control is a method of organizational control in which a firm influences the actions of employees through culture, rewards, and boundaries. See Chapter 9, Exhibit 9.2. Informational control is concerned with whether or not the organization is ―doing the right things,‖ while behavioral control is concerned with whether or not the organization is ―doing things right‖ in the implementation of its strategy. Organizations need to make sure enough information of the right kind is available to monitor activities—this is where financial audits and customer feedback are essential, and where appropriate role models and rewards should be available to keep employees motivated. Chapter 9 emphasizes the importance of aligning both informational and behavioral control systems with organizational strategy. The information gained from the internal and external environment is reviewed against the firm‘s strategy and goals. If the results are not what was expected, then behavioral controls can be utilized to encourage employees to ―do things right‖— TN1-56 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
employee actions can be influenced through building or maintaining a strong positive culture, creating effective reward and incentive programs, and setting boundaries and constraints to minimize improper and unethical conduct (see Chapter 9, Exhibit 9.3). Both the informational and behavioral components of strategic control are necessary, but not sufficient, conditions for success. What good is a well-conceived strategy that cannot be implemented? Or what use is an energetic and committed workforce if it is focused on the wrong strategic target? Zynga appears to practice a contemporary control system using informational control via feedback from the marketplace. Although not stated specifically in the case, it‘s assumed that Zynga tracks data on user activity to gauge interest in specific components of its business model—which virtual merchandise is most attractive, which game tweaks create more play time and subsequent purchase activity. Regarding behavioral controls, especially under Pincus, it‘s obvious that employees, specifically game developers, were punished, rather than rewarded, for not copying code from other successful games. Therefore, there were controls, but no motivation via rewards and incentives, except perhaps to get development done quickly so Zynga could start making money from game players. It appears there were clear boundaries around behavior at Zynga, with, once again, clear direction NOT to be innovative, but instead, copy others‘ successes. Even though the presence of these strategic controls, both informational and behavioral, led to Zynga‘s profitability, it‘s hard to say these controls were effective. Chapter 9 discusses the importance of a strong, positive culture and reward systems that rely more on achievement of jointly created and internalized goals and objectives than on constraints imposed by rules and regulations. Behavioral controls involve a system of rewards and incentives coupled with a strong culture. Managers need to understand the need to hire the right people, that training plays a key role, managerial role models are vital, and reward systems need to be clearly aligned with organizational goals and objectives. An organization can get into trouble when it uses one component of behavioral control as a substitute for the other. In case of Zynga, there WAS a strong culture—one that emphasized the need to pursue profit above all else—and the role model was there in the person of Mark Pincus (after all, he DID win an award for his entrepreneurial activities), but the rewards and incentives, instead of providing motivation, led to the awareness of the boundaries around creative activity (due to the punishment or lack of reward when these boundaries were violated). Zynga‘s example demonstrates clearly that these three levers—culture, rewards, and boundaries—need to be effectively balanced, and that one lever of control cannot take the place of another. While a strong organizational culture can help substitute for other forms like rewards or boundaries, organizations can get into trouble when they try to completely substitute culture for rewards. Instead, a strong culture needs to be coupled with clear rewards and incentives.
TN1-57 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Referencing Chapter 11: Strategic Leadership Part of implementation requires leadership to make sure the firm is staying true to its original vision, mission, and strategic objectives. See the concept of leadership, the process of transforming organizations from what they are to what the leader would have them become. Leadership is proactive, goal oriented, and focused on the creation and implementation of the creative vision. This definition implies dissatisfaction with the status quo, a vision of what should be, and process for bringing about change. Leaders are change agents whose success is measured by how effectively they formulate and implement a strategic vision and mission. See Chapter 11, Exhibit 11.1. This involves: ● Setting a direction ● Designing the organization ● Nurturing a culture dedicated to excellence and ethical behavior The interdependent nature of these three activities is self-evident. Consider an organization with a great mission and a superb organizational structure, but a culture that implicitly encourages shirking and unethical behavior. Often, failure of today‘s organizations can be attributed to a lack of equal consideration of these three activities. The imagery of the three-legged stool is instructive; it will collapse if one leg is missing or broken. Leaders need to set the direction for the organization by continually scanning the environment to develop knowledge of all stakeholders and salient environmental trends and events. Then leaders must integrate that knowledge into a vision of what the organization could become. Leaders require the capacity to solve increasingly complex problems and must be proactive in their approach so they can develop viable strategic options. Leaders are responsible for designing the organization: a strategic leadership activity of building structures, teams, systems, and organizational processes that facilitate the implementation of the leader‘s vision and strategies. Leaders have an important role in creating systems and structures to achieve desired ends. Leaders play a key role in changing, developing, and sustaining an organization‘s culture. An excellent and ethical organizational culture is an organizational culture focused on core competencies and high ethical standards. Organizational culture can be an effective means of organizational control. In nurturing a culture dedicated to excellence and ethical behavior, managers and top executives must accept personal responsibility for developing and strengthening appropriate behavior; consistently demonstrate that such behavior is central to the vision and mission; and develop and reinforce role models, corporate credos, codes of conduct, reward and evaluation systems, and policies and procedures. This requires leaders to overcome barriers to change and effectively use their power. Through Mark Pincus‘ vision and the example he set for his firm, he set a direction for the firm that was proactive. He also designed a process that appeared to get the product to the customer quickly, therefore achieving the desired end of maximizing profitability. It seems likely he was TN1-58 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.