Compete with a disruptive innovator

Sabrina Fruehauf – November 2012

Table of Contents

1. The Client: United Airlines2. Statement of purpose

a. Static and dynamic positioning of United Airlines and Southwest

3. Recommendationsa. Perceptual Mapping studyb. Conjoint Analysisc. Value Curve (Blue Ocean Strategy)

4. Appendix


1. The Client: United Airlines

United Airlines reached out to the Solutions Group in October 2012 after facing steady erosion of its

profitability and market share. Given an increasingly competitive airline industry, in particular the

emergence of a once upstart airline Southwest, United Airlines has gradually lost market share over the

months and is now seeing an opportunity to regain share by splitting the market and targeting the

individual by offering two customized services:

- A parent United brand to target the business end of the market

- The introduction of “TED” for the consumer segment as a direct competitor of Southwest

The Solutions Group feels honored to be chosen by United Airlines as the chief consultant on this project

to help revamp United’s brand image and compete more effectively by offering a customized service to

both the consumer and the business segment’s needs. United Airlines is the world's largest airline in terms

of number of destinations with a net income of US$ 840 MM in 2011.1

Ever since its launch, Southwest was able to gain up to four market share points, mostly at the expense of

the client United Airlines. For the latter, sales had been declining in the past years in particular in the

younger demographic segment such as the ages 23-35. After the latest executive board meeting, an

agreement was reached and mission: “Take on Southwest” was initiated.

2. Statement of purpose

a. Static and dynamic positioning of United Airlines and Southwest

In order to make well-grounded recommendations on how to revamp United’s brand image and on

whether it is worth investing in a new model, it is crucial to frame the current industry first by

understanding static and dynamic positioning. The price-performance curve is an excellent way to show

how the airline industry is shaped and where the individual carriers stand. In every industry the

competing organizations can be attributed to one of three customer tiers: Operational excellence,

customer intimacy and product leadership. The following diagram illustrates United’s static positioning

compared to Southwest’s. It is important to keep in mind that the static positioning model underlies the

basic assumption of there being a positive correlation between price and performance.

1 See corporate website of United Airlines, www.united.com

http://www.united.com/


The model indicates that Southwest clearly falls under operational excellence (OE). Their

strategy is focused on high volume and low margins whereas United concentrate on high margins

and high variety. In order to succeed with an OE strategy, the organization is bound to have a

cutting-edge Supply Chain, Operations and Service Delivery Management in place. This low

cost structure implies lower costs across the board, ranging from pure monetary costs to usage,

maintenance and disposal costs. Lower prices and convenience are what Southwest travelers get

at the expense of lower customization and lower level of service. United Airlines customers, on

the other hand can enjoy high performance, more complexity, more functionality and features

but they do have to bear higher prices. A natural evolution within every industry is the north-east

migration. Usually, the competition in the south-west region is so brutal that companies attempt

to move up one tier by differentiating themselves from the rest. For the airline industry,

Southwest’s strategy is truly disruptive. Prior to them emerging, the industry was shaped by one

airline wanting to be better than the other by offering more features, more destinations, better

service at a higher cost. Southwest used a different mindset. While the other airlines were

battling each other on higher margins, Southwest stepped in and completely revolutionized the

industry by offering cheaper ticket prices achieved by lower costs and lower traditional

performance with fewer extras, less perks, only peanuts and no meals, etc. Focusing on some key

Figure 1: Static positioning model for airline industry, November 2012


factors like keeping cost low allowed them to attract those customers whose main priority was

just to get from point A to B without any need for extras.

Figure 2 displays the southwest attackers as low-end disruptors. In green you see the demand

slowly changing over time and in blue, the individual airline offerings. What becomes evident is

that the disruptive airline model meets the market needs much earlier than the full service

airlines and hence captures a bigger portion of the industry demand. Satisficing beats optimizing.

The reason why Southwest’s model has worked so well is because the company has recognized

that as technology and features increase, customers soon become overserved. Companies that

operate in that upper spectrum don’t do themselves any favor, let alone the majority of

customers. Most people demand a service that will bring them to their destination at a low cost

and preferably on time. United was able to satisfy the underserved customers by beating

competition with price leadership, functionality and reliability but once the customer’s needs

were fulfilled, this strategy is not optimal any more. Once that point is met, competition is

outdone by operational excellence, speed and low cost.

United Airlines has been struggling to respond to this new threat, in particular because in the

past, all they were ever used to is grow and move up the market by adding features in order to

compete with other like-minded airlines. Now, the only way for United to survive in the long

run, is to move down the curve. As proposed by senior management, one approach could be to

Figure 2: Disruptive model of airline industry, November 2012

Underserved customers

Overserved customers


move the parent United brand more up-market and to create a new offering “TED” for the

consumer segment to compete against Southwest Airlines. The following section will provide the

client United with a detailed explanation on how to best counteract Southwest’s strategy and to

develop a sustainable business model that will guarantee a successful thriving of the company in

the marketplace.

3. Recommendation

The question the Solutions Group is essentially trying to answer is whether there is enough space

for both United and TED within one market. A few carefully-selected cutting-edge marketing

tools were chosen to help give best class responses to the questions that the client had

commissioned us with. In order to unleash the optimal space where United could reposition itself

to, a perceptual mapping study was conducted. The perceptual map as a data-driven consumer

insight tool that shows the position of United vs. all relevant competitors’ brands revealed the

following picture:

Figure 3: Perceptual Map of airline industry, November 2012


At first glance the map seems very crowded. Most attributes fell along the horizontal axis, along

with the preference vector which makes the horizontal axis the primary vector and the vertical

axis the secondary.

United ranks high on preference and features like “legroom”, “Quality of meals”, “Standby

options”, etc. The verbal combination of the attributes along the horizontal axis resulted in

“Flights with extra delighters”.

Southwest on the other hand is associated with low prices and far away from all the “delighters”.

They managed to find the white space that was located in the complete opposite direction as

every other brand.

Can United find a new position for its new offering TED? The Solutions Group says yes they

can. Judging from the map, there is enough space for United to serve the business traveler on the

upper end by offering all the nice perks and options and additionally introducing TED, the new

consumer segment service that has reduced features but focuses on the most important ones.

In order to best compete with Southwest, TED doesn’t need extras like “Class Seating Options”,

or “Stand by options”. The reduction of features will allow TED to price itself more

competitively and regain share points from Southwest. To make decisions on which features to

focus on and which on the other hand to neglect, a conjoint analysis was added.

In simple words, conjoint analysis has proven a compelling consumer insight tool to many other

Fortune 500 companies that, by breaking the product into different utilities, depicts the relative

value that consumers assign to certain features and levels of a product or service.2

Down the vertical axis you find all the different features that were tested by the consumer,

ranked in order of importance, with the most important at the bottom. Each bar going along the

horizontal axis represents a level of consumer happiness. The intercept at the bottom (0.58) is

crucial as it portrays the minimum level of consumer happiness that they are willing to accept.

The fact that the intercept is not that high implies that the barriers to entry are low, meaning that

United has to pay close attention to the competitive players. What can be concluded is that

average ticket price has the bars with the highest utility values, followed by no layovers and on-

2 See output IV in appendix for the Conjoint bar graph customized to United, November 2012


time arrival. The individual features combined let us calculate a so-called overall feature

importance.

Average Ticket

Price ; 47%Number of Layovers;

25%

Percent of On-time Arrivals; 14%

Flight Frequency; 8%

Percent of Desired Destinations Available; 2% In-flight Meal Service; 2% Flight Class; 2%

Overall Feature Importance

Figure 4: Overall Feature Importance for Airline Industry, November 2012

What meets the eye is that 86% of the pie is made up by only three features. These are the so-

called hot buttons that United needs to invest in when offering the new service TED to the

consumer segment. “Average ticket price”, “Number of layovers” and “Percent of on-time

arrivals” are the three features matter most to the consumer. By concentrating on expanding

these, United will yield the most success with TED. Compare these findings with the perceptual

map and you find that the “direct flights” vector is also very close to the preference vector. By

contrast, the lowest ranked features are “flight class” and “meal service”, which consequently are

less necessary to keep.

Taking all these findings together, the optimal product for the new TED brand that United is

highly recommended to offer looks as follows3: The 2.26 is the Total Product Utility (TPU) and

determines the best possible utility for TED’s customer.

3 The data shows a sweet spot for “in flight meals”: hot meal has a lower level of consumer happiness than snack”


Figure 5: Optimal Product for TED, November 2012

Tweaking features that are more important to consumers will result in a higher TPU and

eventually lead to a higher market share.

What is the advised form that TED should adopt and where does the differentiation from

Southwest lie? This is where the value curve (also known as Blue Ocean Strategy) comes in. It

depicts the three different brands ranked according to their relative performance among

numerous factors of competition.

Figure 6: Value Curve for United, TED and Southwest, November 2012


What becomes evident is that United ranks relatively high on all the features. Southwest is

known for a high on-time arrival rate, a low price and little to no extras. TED will also be

offering high on-time arrival, low price but the delighter (and the main distinction to Southwest)

is the no-layover factor. Southwest does offer many direct flight options but not enough. TED

can leverage parent brand United’s 78 domestic hubs4 which are usually located more

conveniently than Southwest’s. With a lower price, but the United name over its shoulder, TED

will start attracting more customers and pull more of Southwest’s travelers onto their side.

This leads us to the final recommendation: United will be most successful going forward by

continuing to use United as the main service targeted towards business travelers and TED as the

low-cost consumer-traveler centric carrier under its belt. The perceptual map demonstrated that

United itself is a well-perceived brand since it ranked high on all the main vectors, most

importantly the “brand I prefer” vector. There is no real reason to change this position. However,

the problem lies in the fact that the average consumer is easily drawn to a low-cost carrier that

flies them to their destination for a low price. This describes a need that Southwest took

advantage of. In order to regain market share from Southwest, the client is recommended to

introduce TED as a second offering but targeted solely towards the average consumer: a service

that revolves around the three key features: low price, no layovers and high on-time arrival.

4 See United’s corporate website, www.united.com


Appendix

1. Output I: Static positioning model for airline industry, November 2012

2. Output II: Disruptive model of airline industry, November 2012


3. Output III: Perceptual Map of airline industry, November 2012


4. Output IV: Conjoint Bar Graph for United Airlines, November 2012

Intercept

x1 = $300 ticket price

x2 = $600 ticket price

missing level $900 ticket price

x13 = no layover during flight

x14 = 1 layover during flight

missing level = 2 layovers during flight

x3 = on-time arrival 80%

x4 = on-time arrival 70%

missing level = on-time arrival 60%

x11 = flight frequency hourly

x12 = flight frequency every 3 hours

missing level = flight frequency every 6 hours

x9 = desired destination available 90%

x10 = desired destination available 80%

missing level = desired destination available 70%

missing level = snack during flight

x5 = cold meal during flight

x6 = hot meal during flight

missing level = 1 class - only coach

x7 = 2 classes - business and coach

x8 = 3 classes - first, business, and coach

0.00 0.20 0.40 0.60 0.80 1.00 1.20

0.58

1.00

0.55

0.05

0.54

0.27

0.05

0.33

0.17

0.05

0.20

0.19

0.05

0.09

0.06

0.05

0.05

0.03

0.02

0.05

0.02

0.00


5. Output V: Overall Feature Importance for Airline Industry, November 2012

6.

6.

6.

6.

Output VI: Optimal Product for TED, November 2012

Average Ticket Price

47%Number of Layovers;

25%

Percent of On-time Arrivals; 14%

Flight Frequency; 8%

Percent of Desired Destinations Available; 2% In-flight Meal Service; 2% Flight Class; 2%

Overall Feature Importance


7. Output VII: Value Curve for United, TED and Southwest, November 2012

Compete with a disruptive innovator

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