Balanced Scorecard

Southwest Airlines Co.
Balanced Scorecard Analysis
BALANCED SCORECARD ANALYSIS

Southwest Airlines Co. focuses on short-haul, low-cost services to price and conveniencesensitive travelers. Its vision is to continue being the only short-haul, low-fare, highfrequency, point-to-point carrier in America. In the scope of companys this major strategy, all
of the key indicators, the objectives are formed to relate with it (Refer to major objectives
table). The designed balanced scorecard has four key performance indicators which are
financial, customer satisfaction, internal processes and innovation and learning.
Key Financial Indicators
Southwest Airlines aim to be leader in pricing and leader in Southwest. In the scope of this
strategy, in short-run, expanding into global markets has not been chosen as a financial
objective. In long-run this objective can be added to the designed balanced scorecard.
Besides, companys financial objectives are mainly related with finding new sources of
revenues, increasing customer profitability, increasing revenues, maximizing financial returns,
operating improvements by lowering costs and high utilizations of assets. (Refer to financial
objective explanations)
Key Customer Satisfaction Indicators
Since Southwest Airlines is a service company, customer satisfaction objectives such as new
products, are not chosen for this company. Acquiring more customers, leadership in pricing
with the lowest flight prices, every time on-time flights, on time freight deliveries and
superior quality of service with low costs are the objectives of key customer satisfaction
indicators.(Refer to customer satisfaction indicators). Flight times are the most crucial
indicators because in short-run customers are mostly attracted by on-time flight performance.

Key Internal Processes Indicators

The basic differences while designing the balanced scorecard were about internal process
indicators. For a production company, reduction in inventory may be one of the basic internal
process indicators. However, for Southwest Airlines inventory is stable and processes are
mostly related with services. In the scope of this idea, objectives are improving operational
efficiency, reducing turnaround time, reducing non-core activities and application of cost
reduction program.(Refer to internal process indicators)
Key Innovation and Learning Indicators
New active ingredients, R&D projects may be chosen for many production companies but
again Southwest is a service company and its strategy is mostly related with reducing costs so
the initial training programs should be related with cost management. Therefore, training in
cost management is chosen as one of the objectives and the other ones are increasing
employee efficiency, organization re-alignment with core competences, and behaving
employees as future customers-employee satisfaction.(Refer to innovation indicators)

APPENDIX
PHASE I: THE STRATEGIC FOUNDATION
In order to define major strategies of Southwest Airlines Co., we should take into
consideration of vision and mission statements because strategies are determined in the scope
of companys vision, missions and goals.
The Vision of Southwest Airlines
It is to continue building on their unique position -- the ONLY short haul low-fare highfrequency point-to-point career in America.
The Mission of Southwest Airlines
The mission of Southwest Airlines is dedication to the highest quality of Customer Service
delivered with a sense of warmth, friendliness, individual pride, and Company Spirit.
Mission Related with Employees (Internal Processes)
The company is committed to provide their Employees a stable work environment with equal
opportunity for learning and personal growth. Creativity and innovation are encouraged for
improving the effectiveness of Southwest Airlines. Above all, Employees are provided the
same concern, respect, and caring attitude within the organization that they are expected to
share externally with every Southwest Customer.
Core Goal of the Company
Southwest Airlines Co.s main goal is to sustain operating efficiency.
Market Segment
Company focuses on customers requiring readily available short-haul low-fare flights.
Slogan
The Best Airline in the South-West. 1

Swot Analysis
Strengths: They are a small compact group and are therefore better able to collaborate.
Weaknesses: The collaboration needs to improve to the extent where all employees are
thinking strategically.
Opportunities: Company can improve the performance if they all work closely and STAY
FOCUSSED.
Threats: Larger airlines can "Product Dump" in the companys area. 2
MAJOR STRATEGIES
When designing a balanced scorecard, we always start by asking: What is your strategy?
Once we understand the strategy, we can build a new framework for describing the strategy,
which we call a strategy map.
The Strategy Focused Organization by Robert S. Kaplan & David P. Norton
Strategy map is the visual presentation of key performance indicators and it summarizes every
strategy related to each measurement categories. The main four categories are; Financial,
Customer Satisfaction, Internal Processes and Innovation and Learning categories. In order to
draw the strategy map, first, the objectives related with the above stated vision, mission, goals
and the short-haul, low-cost service strategy of the Southwest Airlines are determined. They
are;

Major Objectives of the Target Company
Find new sources of revenues,

Increase customer profitability,
Increase revenues,
Maximize financial returns,
Operating improvements by lowering costs,
High utilizations of assets,
Acquiring more customers,
Leader in pricing with the lowest flight prices,
Every time on-time flights,
On time freight deliveries,
Superior quality of service with low costs,
Improve operational efficiency,
Reduce turnaround time,
Reduce non-core activities,
Apply cost reduction program,
Training in cost management,
Increase employee efficiency,
Organization re-alignment with core competences,
Behave employees as future customers-employee satisfaction
After determining the objectives, we should allocate each objective to each four measurement
categories. This is the strategy map phase which forms the basis of balanced scorecard.

PHASE II: BALANCED SCORECARD FRAMEWORK
Balanced Scorecards tell you the knowledge, skills and systems that your employees will need
(learning and growth) to innovate and build the right strategic capabilities and efficiencies
(internal processes) that deliver specific value to the market (customer) which will eventually
lead to higher shareholder value (financial).
Having Trouble with Your Strategy? Then Map It by Robert S. Kaplan and David
P. Norton - Harvard Business Review
Not only does the Balanced Scorecard transform how the strategic plan is expressed, but it
also pulls everything together. This is the so-called cause and effect relationship or linking
of all elements together. For example, if you want strong financial results, you must have
great customer service. If you want great customer service, you must have excellent processes
in place (such as Customer Relations Management). If you want great processes, you must
have the right people, knowledge, and systems (intellectual capital).3
Balanced scorecard provides an integrated scope of companys strategies and the performance
measures shows if the company is successful on implementing these strategies. In our
balanced scorecard we do not only use financial measurement categories but also use
nonfinancial information in the categories so that the company is analyzed as a whole.

Strategy Map Fitted to Measurement Categories for Southwest Airlines Co.4
After determining the strategy map, we justified the objectives with the performance
measures. Every performance measure should reflect the objective value. The four categories
of key indicators are used for evaluation of the company as a whole and since Southwest
Airlines Co. focuses on short-haul, low-cost service to price and convenience-sensitive
travelers, all of the key indicators, the objectives are formed to relate with this strategy.

We assume that all of our measurement parameters are used annually to determine whether
company has a high performance or not. In the evaluation stage, these measurements should
be compared with past years values and target values.

Key Financial Indicators

Find new sources of revenues: Southwest Airlines goal is to have the minimum costs and
minimum fares for its customers but while implementing this strategy it needs several sources
of revenues. In order to minimize the fares, company should have new sources of revenues to
compensate the costs.
Increase customer profitability: Besides lowering the fares, company should have its
customer profitability increased so that the sales and revenues increase respectively. By the
help of that, financial performance increases too.
Increase revenues: The main goal of a company is to increase the revenues and this objective
is one of the financial key indicators.
Maximize financial returns: Revenue sources may be good enough to make many
investments. However, the amount of money used is not a key performance value by itself.
Southwest Airlines should also receive the financial return of its investments in order to
continue being a strong company in the air transportation market.
Operating improvements by lowering costs: Southwest Airlines provide promotions with
free tickets so in each flight there is quota for these free tickets. This causes a sunk cost for
each flight. These costs should be eliminated with a control system for free tickets and have
the full capacity purified from sunk costs.
High utilizations of assets: Because of time-value of money, all of the assets should be
utilized in order to prevent the losses caused by time. Our company has a growing marketshare and while growing, making benefit from its increasing assets is very important.

Measurements for key financial indicators are;
Number of New Sources: In order to determine the amount of new revenue resources
provided in each period, they should be measured annually. Thus, number of new
resources each year gives the potential growth of Southwest Airlines provided from
different revenue resources too.
Return on Sales: This ratio determines how much of the net income is derived from
the sales. This is a good measure to find the customer profitability of the target
company. If this ratio increases, this means that Southwest Airlines net income, the
customer profitability increased more compared to sales.
Annual Growth Rate: Southwest Airlines aims to be the best airline in the South-West
and annual growth rate gives the idea of increased revenues and the place of the
company in the desired market.
Return on Equity: Earnings per share determine the amount of financial returns made
on investments. This is the ultimate measure of performance from the shareholders
perspective for Southwest Airlines.
Annual Sunk Cost: In order to improve the operations, the sunk costs must be
eliminated and then costs are decreased and operations profitability decreases. So the
annual sunk cost should be determined to present the performance.
Utilization Rates: This ratio determines the performance of Southwest Airlines in

utilization of their assets.
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Key Customer Indicators

Acquiring more customers: Increasing number of customers provides a strong clue about
companys future and potential growth in the market. This gives an idea about customer
satisfaction. Since Southwest Airlines aim to stay in the market as a unique business providing
short-haul low-cost service, increase in number of customers is a perfect indicator.
Leader in pricing with the lowest flight prices: Having low prices may seem to cause
decrease in income in short-run; however, it provides Southwest Airlines the advantage of
leadership in the low-price market in long-run. Customers are attracted with low prices and
the sales amount increases respectively. This indicator is chosen according to potential future
growth of the company in the market as being the leader in pricing.
Every time on-time flights: One of the basic indicators for customer satisfaction is on-time
flights. Southwest Airlines had the low-price company image but customers would not prefer
the company when flights are not on-time even if price is low. Therefore, this key indicator is
chosen to determine meeting customer expectations.
On time freight deliveries: Southwest Airlines also gives service as freight. The customers
similarly expect on-time deliveries for their packages. Again, low-fare itself is not enough,
service quality should be measured too.
Superior quality of service with low costs: In short-run, decreasing quality in service may
seem to be a good option to eliminate or decrease the major costs. However, in long-run,
company would be negatively affected because of having no drink-meal service during the
flights. In order to prevent this disadvantage, superior quality of service with low costs is
chosen as a key customer indicator.
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Measurements for key customer indicators are;
Annual Number of New Customers: In order to measure the performance of acquiring

new customers, annual number of new customers is the criteria which will provide
sufficient information about the improvement in the customer satisfaction perspective.
Competitive Comparison: Comparison of the competitors in the market with the

Southwest Airlines gives sufficient information about being leader in pricing in the airtransportation market. This measure provides whether company is achieving its
strategy.
Annual Proportion of On-Time Flights to Total Flights: The best way to measure the
on-time flight performance is to take the annual proportion of on-time flights to total
flights.
Annual Proportion of On-Time Freights to Total Freights: The best way to measure the
on-time freight performance is to take the annual proportion of on-time freight to total
freights
Customer Satisfaction Survey: Customer satisfaction can be measured with several

surveys by wanting them to rate their satisfaction levels. This survey provides
information if customers are satisfied with Southwest Airlines superior quality of
service with low costs or not.
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Key Internal Processes Indicators

Improve operational efficiency: Since Southwest Airlines is a service company internal
processes do not include any production phases. However, there are services instead of
productions. The reason of choosing operational efficiency as an indicator is that operational
efficiency can be measured by service times and this is one of the important indexes for
service improvement.
Reduce turnaround time: Reducing turnaround time ensures frequent departures with fewer
aircraft. This provides a decrease in costs so it is an important objective for Southwest
Airlines.
Reduce non-core activities: Non-core activities reduce the productivity of the company and
also cause additional cost for the company. So by eliminating the defects, non-core activities
like maintenance should be reduced to minimum.
Apply cost reduction program: Southwest Airlines main strategy is to reduce all of the
costs and provide lowest-fare for their customers. To achieve this goal, there should be a cost
reduction program inside of the company. This is the reason for choosing applying costreduction program inside of the company.
Measurements for key operating indicators are;
Flight Times: The measure of operational efficiency can be calculated by flight times.
If the flight times are decreasing then Southwest Airlines have an increasing
operational efficiency.
Turnaround Time: Turnaround time affects the amount of aircraft used because when
turnaround time decreases; it ensures frequent departures with fewer craft.
13

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

inefficiency in internal processes. In order to determine Southwest Airlines
performance, percentage of non-core activities should be calculated.
Percentage Cost of Sales: In order to apply cost reduction programs, each cost
percentage in terms of sales should be determined. This ratio provides sufficient
information about the efficiency of cost reduction program.
Key Innovation and Learning Indicators

Training in cost management: Since Southwest Airlines strategy is to minimize the costs,
cost management should be applied in the learning and innovation perspective. Employers are
the key elements of the company to ensure improvement in cost reductions. This objective is
chosen to improve Southwest Airlines strategy beginning from the basis.
Increase employee efficiency: Southwest Airlines is in service business with its educated
employees and aircrafts. This objective is chosen in order to increase customer satisfaction
and the sales; first of all, employees should be efficient to assist their clients.
Organization re-alignment with core competences: Southwest Airlines is a growing
company and organizational structure can be improved according to competences. This
objective is chosen to provide advantage for the company in the market with its efficient
organizational structure.
Employee satisfaction - Behave employees as future customers: Inside the company,
employees are seen as future customers. This objective is chosen because creativity and
innovation are encouraged for improving the effectiveness of Southwest Airlines. This
14

objective ensures employees share their satisfaction externally with every Southwest
Customer.
Measurements for key innovation and learning indicators are;
Annual Number of Training Programs: In order to measure the importance given to

cost management trainings, annual number of training programs provide sufficient
information.
5 Point Ranking: Employee efficiency can be measured with 5 point ranking which
provides every employee to be graded over 5 point scale and this measure encourages
them to be more effective in doing their jobs.
Structure of the Organization: Compared to competitors Southwest Airlines should

have more efficient organizational structure and this can be measured by comparing
structures of companies having same objectives in the same market.
Employee Satisfaction Survey: For Southwest Airlines, in the scope of employers

being future customers their satisfaction becomes nearly as important as customer
satisfaction and it can be measured with the surveys and their complaints can be
determined and companys employee efficiency also can be improved by the help of
these surveys.
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Evaluation of the Balanced Scorecard

Next step of the balanced scorecard is to measure the objective values. However,
measurements themselves are not enough to evaluate the company. For every key indicator, at
least one previous periods values, current periods values and pre-determined future target
value should be compared with each other. After these steps, company can be evaluated.
Summary
While designing balanced scorecard objectives should be related with companys major
strategy. Southwest Airlines major strategy is to continue being the only short-haul, low-fare,
high-frequency, point-to-point carrier in America. Therefore, in short-run, reducing fares may
seem to be an income decreasing strategy; however, in long-run it provides the company
being leader in the market in Southwest. Additionally, all of the measures are determined in
conjunction with their objective criterion.
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REFERENCES
1
http://www.southwest.com/about_swa/mission.html
Vision, Mission, Values Module of Strategy Map Balanced Score Card Software-
Personal Version- www.strategymap.com.au

3
http://www.exinfm.com/training/pdfiles/course11r.pdf
Strategy Map Module of Strategy Map Balanced Score Card Software-Personal
Version- www.strategymap.com.au
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Southwest Airlines Co.