Balanced Scorecard: Southwest Airlines

Balanced Scorecard: Southwest Airlines

Course: ACCT 241: Principles of Managerial Accounting
Written: November 25, 2014 
Published: September 19, 2017
© All Rights Reserved

1. What is a Balanced Scorecard and what are its key features?

According to our textbook, a Balanced Scorecard (BSC) is strategy performance measurement tool defined as: “a model of business performance evaluation that includes several types of financial and nonfinancial performance measures, typically comprising the following perspectives: financial, customer, internal business process, and learning and growth (Managerial Accounting, 515). From this definition, we can see that the key features of a BSC include 4 areas: financial perspective, customer perspective, internal business process perspective, and learning and growth perspective. In this way, the BSC can help us answer 4 pertinent questions (See Exhibit A).


Perspective Area

Key Question

Financial

How do we look to our owners or shareholders?

Customer

How are our customers perceiving us?

Internal Business and Process Perspective

What internal activities should we make more efficient?

Learning and Growth

How can we improve and grow, all while creating value?

Exhibit A: 4 Key Questions the Balanced Scorecard Helps Us Answer, Source pg. 515

From a historical perspective, Dr. Harr emphasized in class on Friday, November 14, 2014 that the Balanced Scorecard was created by the same folks that created Activity Based Costing.

2. How can a Balanced Scorecard be used to measure performance?

A Balanced Scorecard (BSC) can be used to measure performance by analyzing the 4 key perspective areas. As a prime example, we can measure the financial perspective area of a BSC with the following measures: profit growth percentage, revenue growth percentage, and return on assets (Managerial Accounting, 515).  As a whole, the BSC combines both lead and lag measures to measure performance. Lead indicators guide current decisions, while lag indicators guide final outcomes. Our textbook explains this succinctly by stating:

“ The whole idea of the balanced scorecard is to use lead indicators to communicate with, motivate, and evaluate individuals with the expectation that their current actions will result in improvements in the company’s important lag measures...in the future” (Managerial Accounting, 518).

A Forbes article titles: “The Key to Management: A Balanced Scorecard” by Gene Marks highlighted that a Balanced scorecard “ boosts performance using a combination of metrics, goals and process improvements” (Forbes, 2008).

3. Given the logical relationships between the four key areas of the Balanced Scorecard, how do these four areas tie together or relate to one another?

The 4 areas of the Balanced Scorecard (BSC) relate to one another by forming a cohesive framework for how management should improve its long-term goals with both financial and non-financial measures. Collectively, all 4 areas help management make rational and measurable decisions towards improving those goals in a way that creates value. Individually, the benefit of analyzing each area from 1 of the 4 dimensions allows managers to form conclusions from a different perspective.

An article by the Harvard Business Review supports the notion that analyzing information from 4 different perspectives is advantageous (See Exhibit B). Robert Kaplan and David Norton assert that: “While giving senior managers information from four different perspectives, the balanced scorecard minimizes information overload by limiting the number of measures used” (Harvard Business Review, 2005). As a whole, the implication of these 4 areas working unanimously is an improvement of goal congruence within the organization.

Exhibit B: Harvard Business Review Performance Measures Linkage, 2005

4. Based on your research, provide the specific mission statement for your assigned airline.

For the purposes of this assignment, my assigned airline is Southwest Airlines. Coined in 1988, the specific mission statement of Southwest Airlines is: “...dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit” (Southwest, 2014). From this statement, we can see that Southwest values quality customer service, good consumer loyalty, and a positive brand reputation.

5. What are the overall, long-term goals for your assigned airline?

After a thorough analysis of Southwest Airlines’ goals, mission, and purpose, we can see that they value the triple bottom line approach: financial, environmental, and social. Therefore, Southwest’s goals fall underneath the 3 pillars of the triple bottom line approach. Normally, within the triple bottom line approach, we categorize the three pillars as: people, profit, planet. However, Southwest categorizes their three pillars as: performance, people, planet. Nonetheless, Southwest's’ goals include (Southwest, 2014):

Performance

  • To maintain consecutive profitability
  • To increase net income
  • To increase stockholders return on investments (repurchases, common stock, and dividends)

People

  • To create a “job-secure” environment for employees and deliver great customer service experiences
  • Encourage volunteerism amongst employees

Planet

  • To operate efficiently and minimize the negative impacts on the environment
  • To maintain a responsible use of resources, conservation, and mitigation of  environmental impacts

6. Balanced Scorecard: Southwest Airlines

Financial Perspective

Internal Business Process Perspective

1. Profit Growth: 47.8% increase

2. Revenue Growth: 5.6% increase


Source: Southwest 2014 3rd quarter profit report

1. Fleet Increase: 685 aircrafts

2. Sustainable Operating efficiency: 50 million kilowatt-hours of renewable energy

Source: Southwest 2014 3rd quarter profit report and Triple Bottom line page

Customer Perspective

Learning and Growth Perspective

1. Daily Reservations: 57,901

2. Customer Satisfaction Score: 89


Source: 2014 Corporate Fact Sheet and The Economist

1. New Processes: 3,600 flights a day

2. Flight Completion Record: 98.3%


Source: 2014 Corporate Fact Sheet

 

Financial Perspective

  • Profit Growth: Operating income was $649 million in 2014 3rd quarter in comparison to $439 million in the 2013 3rd quarter period (Southwest, 2014).
  • Revenue Growth: 5.6% increase 2014 3rd quarter operating revenues in comparison to 2013 3rd quarter (Southwest, 2014)

Internal Business Process Perspective

  • Fleet Increase: Fleet increased by two to 685 aircraft during 2014 3rd quarter. “This reflects the third quarter 2014 delivery of 11 new Boeing 737-800s and two pre-owned Boeing 737-700s, as well as the retirement of one Boeing 737-500” (Southwest, 2014).
  • Sustainable Operating Efficiency: Renewable energy commitments increased to include more than 50 million kilowatt-hours of renewable energy in 2013 and 2014 (Southwest, 2014)

Customer Perspective

  • Daily Reservation: Customer Service representatives “book, on average, 57,901 reservations daily; 406,422 reservations weekly; and 1.8 million reservations monthly” (Southwest, 2014).
  • Customer Satisfaction Score: On a 69-100 scale by the American Consumer Satisfaction Index (ACSI), Southwest ranked 89 in 2013 (Economist, 2013).

Learning and Growth Perspective

  • New processes: Flights a day total 3,600 as of 2014
  • Flight Completion Record: In 2014, the record was 98.3%

7. Comparing and Contrasting 8 Key Performance Measures

Southwest

American

United

Delta

Financial*

EPS

1.94

5.60

4.88

3.23

Market Cap

$26.14 B

$30.9 B

$20.6 B

$36.4 B

Customer*

Market Share

12.6%

19.9%

16.0%

18.0%

*Sources: Bloomberg (EPS and Market Cap) and IBISWorld (Marketshare)

Comparison and Contrasts

As we can see from the data above, Southwest has the lowest Earnings Per Share Ratio (EPS) in comparison to American, United, and Delta. Considering the fact the EPS is a measure of profitability, this tells us that Southwest’s stock may be worth less in comparison to its competitors stock. According to NASDAQ:

“EPS tells us how much of that money is flowing down to stockholders. EPS tells you how much money the company is making in profits per every outstanding share of stock. The higher the EPS is, the more money your shares of stock will be worth because investors are willing to pay more for higher profits” (NASDAQ, 2014).

In this way, we can see that Southwest EPS of 1.96 may mean that their stock is worth less in comparison to the other EPS calculations of its competitors.

Quite similar to EPS, Southwest also has the smallest market share in comparison to American, United, and Delta. Since market share is a measure of competitiveness, this tell us that Southwest’s revenue relative to the total airline industry revenue may be lower than its competitors. At the same time, this may also infer that the total number of Southwest planes  relative to the total number of planes in the industry,  may be lower than its competitors.

Opportunities for Improvement

Since Southwest has a low EPS in comparison to its competitors, there is opportunity for Southwest to either increase their Net Income or decrease the number of outstanding shares given to stockholders. EPS is calculated as Net income-Dividends/Average Outstanding Shares (Investopedia, 2014). Considering that Southwest revenue increased this quarter, this may not be a large concern but nonetheless, net income is impacted by expenses as well. So, Southwest (as like any company) should continue to find ways to decrease expenses whether that means investing in sustainable energy or reducing waste.

In relation to market share, perhaps Southwest could increase diversification of products or services. In this way, they could expand their market dominance. If they really wanted to be ambitious, than they could consider acquiring another airline company that is profitable in an effort to increase their market share.


Appendix

References

 

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