ASSESSMENT3-1 COMPANY'S MARKET SEGMENTS

Company's Market Segments

Southwest Airlines
Ferdinand (JR) Karbowski Jr
Capella University
March 22, 2016

ASSESSMENT3-1 COMPANY'S MARKET SEGMENTS

Introduction
In order for a company to define market segments, they must go through a process of
discovery that begins with in-depth research. This in-depth research usually entails a company
going through the steps of uncovering, developing, defining, and targeting specific markets. This
means understanding the marketing environment. Broadly speaking, the marketing environment
is defined as the forces that directly and indirectly influence an organizations capability to
conduct its business. There are two primary components that encompass a marketing
environment for any company. They are: 1) The internal environment and 2) the external
environment. Fully understanding these marketing environment forces: is essential for corporate
planning; helps a business to compete more effectively against its rivals; assists in the
identification of opportunities and threats; and enables an organization to take advantage of
emerging strategic opportunities. An exhaustive evaluation of the marketing environment helps
dictate the market segments that a company may choose to compete in. For Southwest Airlines,
they were pioneers in the low-cost airline segment and have continued to define and re-define
this market segment in the airline industry.
Southwest Airlines Market Segments
Southwest Airlines has one vision to become the Worlds Most Loved, Most Flown, and
Most Profitable Airline. (Southwest Annual Report, 2014, p. 3). In order to realize that vision,
they have developed a niche market strategy. Southwest Airlines targets cost-conscious, no-frills
travelers, looking for the best value for their dollar. Their marketing approach is simple. It
wooed passengers with ultra-friendly onboard service, squeezed more flights a day from every
plane, and made money not by raising fares but by lowering themand hence filling seats with
folks who could never before afford to fly. (Tully, 2015, p. 130). Yet the airline never

ASSESSMENT3-1 COMPANY'S MARKET SEGMENTS

compromised on quality or safety. The three (3) market segments they target includes: business
men and women; leisure families; and frequent flyers.
How Marketing Fits into the Internal and External Environments at Southwest Airlines
Internal Environment
The internal environment is described as the forces and actions inside the firm that affect
the marketing operation composed of internal stakeholders and the other functional areas within
the business organization. A useful tool for auditing a companys internal environment by
applying what is known as the Six Ms which are Men, Money, Machinery, Materials and
Minutes and Management. (Sherlekar & Sherlekar, 2010, p. 118). The internal environment
includes: the HR department; the flight operations department; the accounting / finance
department; and the market research department.
The specifics regarding the internal environment means comprehending a companys
internal processes and procedures. For Southwest Airlines it means: understanding the allocation
of responsibilities within the organization; addressing resources availability; managing the extent
to which the major functional areas work together in support of the customer-oriented marketing
effort; and finally, being aware of the underlying Southwest culture instilled by the founders.
External Environment
The external environment is further decomposed into the micro environment the broad
forces which shape the character of opportunities and threats and the macro environment the
factors in the immediate environment.
The micro environment looks at the forces close to the company that affects its ability to
deliver its product or service. It comprises of all the organizations and individuals who directly
affect the activities at Southwest Airlines. It also takes into account all factors which have a

ASSESSMENT3-1 COMPANY'S MARKET SEGMENTS

direct impact on the airline with respect to a particular market such as: suppliers; the marketing
channels; customers; competitors; and the public at large.
Southwest Airlines is the largest operator of Boeing 737 aircraft in the world. Boeing is a
key supplier and has a substantial impact on the marketing operations of a company. Southwest
Airlines successfully manages its relationship with Boeing to lower its costs (both initial and
operating costs primarily because of economy of scale) while maintaining aircraft quality
standards thus gaining a competitive advantage in the market. When it comes to promoting,
selling and distributing tickets to its customers, the airline has long maintained its independence.
In other words, they have relied primarily on their own travel agents, call centers, and website
rather than rely on external travel agents, or website aggregators such as Orbitz, Kayak, and
Travelocity. When Southwest Airlines began operations, it targeted the leisure traveler and to a
large extent, the business traveler. They wanted to specifically encourage the budget-conscious
traveler that ordinarily would drive to their destination to fly instead. More recently, the airline is
placing a greater emphasis on business travelers, but the focus has been the same. Before
Southwest, it usually made sense for a businessman to drive from San Antonio to Houston for an
afternoon meeting. Not anymore. For $40 you could hop on a flight with incredibly friendly
hostesses and wisecracking pilots and be in Houston for the meeting and lunchand still be
back in San Antonio by late afternoon to shoot a round of golf. (Gwynne, 2012, p. 129). Since
pioneering the low-cost airline model, other competitors have emerged. Airlines such as JetBlue,
Spirit, Frontier, and Allegiant have penetrated the marketplace. Southwest Airlines does an
exceptional job in differentiating themselves in what has now become a mature and largely
saturated market in the United States. Specifically, while most of its competitors have tagged on
fees for almost all ancillary costs, Southwest Airlines is alone in the fact that passengers are

ASSESSMENT3-1 COMPANY'S MARKET SEGMENTS

allowed up to two (2) bags free as part of their ticket fare. In 2011, by refusing to nickel-anddime customers, Southwest added two percentage points of market share, increased passenger
loads by 10% and brought in $2 billion in incremental annual revenueat a cost of $500 million
or so in forgone bag fees. (Whelan, 2011, para. 5).
The macro environment as part of the external environment refers to those factors which
are external to a companys activities and do not concern the immediate environment. It
comprises general forces that affect all business activities in market. The framework used to
perform the analysis of the macro environmental factors is commonly referred to as a PEST
analysis and includes Political, Economic, Social, and Technological environmental aspects.
(PEST Analysis, 2015, para. 1).
Since the airline industry is highly regulated, Southwest Airlines must pay particular
attention in this area not only in terms of legislation, but also in changing government agency
enforcement. The Wright Amendment which severely limited flights operating from Dallas Love
Field is a prime example of the maneuvering that the airline faces in this area. Similarly, the
economic environment for airlines has traditionally been highly volatile. The economy with
particular emphasis on fuel prices (which is the airlines largest operating expense other than
labor costs) has a significant impact on Southwest Airlines. Southwest Airlines has been highly
skilled and successful when it comes to its fuel hedging strategy. In todays environment, social
responsibility has an ever increasing presence in the marketing literature and the overall
marketing efforts as demanded by the public to eliminate socially harmful products. Southwest
takes environmental awareness seriously Beginning in 2016 the airline will use low-carbon,
renewable jet fuel on select flights in partnership with Red Rocks Biofuels. (Lorenzetti, 2014, p.
38). In the end, people trust Southwest Airlines and employees trust Southwest Airlines to do the

ASSESSMENT3-1 COMPANY'S MARKET SEGMENTS

right thing. Perhaps the most dramatic changes shaping the airline industry and Southwest
Airlines in particular is related the technological advancements such as e-Tickets and on-board
Wi-Fi. This has created new markets and opportunities for Southwest Airlines for its flying
public. The challenge is to provide practical, affordable products and services to its passengers.
Innovative and Sustainable Solutions to Strategic Marketing Challenges at Southwest
Airlines
Perhaps one of airlines biggest challenges has to do with attracting more business
travelers. This is critical because historically, business travelers are the most lucrative and
potentially the most profitable customers in the industry. However, Southwest Airlines does not
provide business class seats. Traditional business class passengers expect to have all the perks
that go along with the business class status (i.e. meals, larger seats, increased legroom, in-flight
entertainment, etc.). Southwest Airlines offer none of those perks. Todays tougher economic
environment has actually worked to Southwest Airlines benefit. Many companies are reluctant to
pay for full-fare business class tickets and are requiring employees to seek more economical
methods of business travel. In 2013, in order to cater for these types of business passengers,
Southwest Airlines created Business Select fares. For $40, Southwest will let customers pay
to jump into its A boarding group and get onto the aircraft ahead of others. (The Associated
Press, 2013, p. 5B). By becoming part of the A boarding group, business select passengers
have a better chance at preferred seats.
Conclusion
When Southwest Airlines identifies the market segments it wants to serve, they must
perform an analysis of the market. The purpose of the analysis is to: know where the

ASSESSMENT3-1 COMPANY'S MARKET SEGMENTS

environment is heading; discern which events and trends are favorable; assess the scope of
various opportunities; and help secure the right fit between the environment and the business.
It is widely recognized that no company, not even Southwest Airlines has any control
over the macro environment. The company can only respond to changes. When it comes to the
micro environment, Southwest Airlines has some influence, but by no means complete control.
In other words, Southwest Airlines has control over its internal environment with respect to their
marketing operations, but not complete control over its consumers, suppliers, or stakeholders.
Fully understanding these marketing environment aspects allows Southwest Airlines to continue
to refine the low-cost airline model which they pioneered and the market segments they serve.

ASSESSMENT3-1 COMPANY'S MARKET SEGMENTS

References
Gwynne, S. (2012). LUV and war at 30,000 feet. (Cover story). Texas Monthly, 40(3), 124-196.
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Lorenzetti, L. (2014). Southwest airlines is flying high. Fortune, 170(6), 38. Retrieved from
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PEST Analysis. (2015). The Hutchinson unabridged encyclopedia with atlas and weather guide.
Abington, United Kingdom: Helicon. Retrieved from http://library.capella.edu/login?
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Sherlekar, S. A., & Sherlekar, V. S. (2010). Global marketing management. Mumbai, India:
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Southwest Airlines. (2014). 2014 Annual Report. Retrieved from
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The Associated Press. (2013, January 22). Southwest: fliers can pay $40 to board first. USA
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ASSESSMENT3-1 COMPANY'S MARKET SEGMENTS

Tully, S. (2015). Southwest's radical new flight plan. Fortune, 172(5), 128-136. Retrieved from
http://ezproxy.library.capella.edu/login?url=http://search.ebscohost.com/login.aspx?
direct=true&db=bth&AN=109948119&site=ehost-live&scope=site
Whelan, D. (2011, July 18). All grown up. Forbes, 1. Retrieved from
http://search.proquest.com.library.capella.edu/docview/874969947?accountid=27965