A8.Strategy.03Jun

8/6/2019 A8.Strategy.03Jun

http://slidepdf.com/reader/full/a8strategy03jun 1/17



Table of ContentsIntroduction...........................................................................................................3

History:...............................................................................................................3

Environmental factors affecting the British Airways..............................................4

Micro- Environment............................................................................................4

Macro-Environment............................................................................................4

Strategic Analysis for Macro-environment.............................................................5

PEST Analysis:....................................................................................................5

Political Factors:..............................................................................................5

Economic Factors:...........................................................................................5

Social and Cultural Factors:.............................................................................6

Technological Factors:.....................................................................................6Porter’s Five Force Analysis:...............................................................................6

Threats of New Entrants:.................................................................................7

Threats of Substitutes:....................................................................................7

Bargaining Power of Suppliers:........................................................................7

Bargaining Power of Customers:.....................................................................7

Industry Rivalry:..............................................................................................7

Strategic Analysis for Microenvironment:..............................................................7

SWOT Analysis:...................................................................................................7

Strength:.........................................................................................................8

Weakness:.......................................................................................................8

Opportunities:..................................................................................................8

Threats:...........................................................................................................8

Various Strategic Planning Models - An Overview..................................................9

Basic Strategic Planning:....................................................................................9

Goal Based Planning:..........................................................................................9Alignment Strategic Planning Model:................................................................10

Scenario Model:................................................................................................10

Self-Organizing Planning Model:.......................................................................10

Risk Management – Objectives and Policies........................................................10

Fuel Price Risk:.................................................................................................11

Foreign Currency Risk:.....................................................................................11

Interest Rate Risk:............................................................................................11

Credit Risk:.......................................................................................................12



Liquidity Risk:...................................................................................................12

Capital Risk:......................................................................................................12

Conclusion...........................................................................................................13

References:..........................................................................................................14

References:



IntroductionStrategy can be defined in many forms, Kenneth Andrews (1971) defined

it as “The pattern of major objectives, purposes or goals and essential policies or

plans for achieving those goals, stated in such a way to define what business the

company is in or is to be in and the kind of company it is or is it to

be“(Macmillan, H. Tampoe, M. P13). The strategic management area is very wideand managing the strategic planning is a challenging task performed by the

managers. Strategic management plays a vital part in a globally established

organisation, since hospitality and tourism industry in the modern world is a

global business and strategic management when properly implemented gains

competitive advantage to the business. Managers for achieving the qualities of

leadership should follow some basic strategic management ideas. As strategic

management is a process the most difficult part is executing the plans in real

time of business, planning for future and proper execution of the plans so that

the future of the business is secured.

In this report, the researcher has explained various environments related

to strategic management and the factors effecting the growth of the hospitality

and tourism industry. The organisation chosen for the strategic analysis is

British Airways, one of the world’s largest international passenger carriers.

History: The first British Airline was established in the year 1919, at that time the

home of airlines is Honslow and the first travel was made from Le Bourget –

Honslow. Imperial airways which are a merger of airline companies which

included Aircraft transport and travel, Handley page transport, Instone airline

and British marine air navigation. The growth of the company was rapid and it



received the first Boeing 747 by 1970. In 1976 British Airways was established

which was the result of the committee formed by Sir Ronald Edwards in 1967

which put forward the coloration of BOAC (British Overseas Airways Corporation)

and BEA (British European Airways).

Environmental factors affecting the British AirwaysBritish Airways as an organisation should be prepared at any time for the

changes by the market forces. Market forces affecting a business are classifiedinto two, one is which has direct impact on the business and the other one is

indirect impact to the business. There are many forces like government laws,

political issues, socio-economic problems, economy and technology which in a

group or single can demolish a well established business organisation if not

properly handled; these are further refereed as strategic environment. To

prevent demolition of the business it is necessary to analyse the environment

forces. The environment force can also be classified as internal and external

environments which are Micro-Environment and Macro-Environment.

Micro- EnvironmentAs mentioned above the micro-environment factors are which has impact

on the business internally, some of them are customers, suppliers, shareholders,

media, employees, and competitors etc. Various changes in these factors which

affect the business are analysed using SWOT analysis.



Fig 1: Factors involved in Micro-environment [Ref : ]

Macro-EnvironmentUnder this environment the factors affecting the business are very

powerful; each one is powerful enough to destroy the business or even in a

group, so it is most important that these factors are analysed properly and

handled accordingly. There is more than one type of analysis for macro-environment which described in this report is PEST analysis and Porter’s 5 Forces

analysis.

Fig 2: Factors in Macro-environment [Ref : ]



Strategic Analysis for Macro-environment

PEST Analysis: The abbreviation for PEST is political, economic, social and technological

factors and so PEST analysis means how these factors affects a business

organisation in our case which is British Airways. This analysis will help the

managers for developing a strategic plan for the future business of British

Airways.

Political Factors:

In 2010 government has passed a new rule which implies the rise in duty

for Air passenger. An additional tax of £240 should be paid by a family of 4

travelling from Florida, so this in turn will make the tourist passengers to give a

second thought before travelling. So including return tax fare the amount to be

paid is very high. Unions which now has become a part of the business

organisation and nowadays they have planned many strikes against BA, the losscaused by these strikes is immense. Most of these strikes are internally planned

by political parties. Airport authority controls have set many new rules which

were followed by British Airways. After 9/11 the security measures in London is

increased which had small implications on the business of BA which restricted

their passenger to carry only one hand luggage. These constraints restrict

passengers to a certain limit for travelling to UK which causes the tourism

industry as well as the hospitality industry.

Economic Factors:

There are many economic conditions which affect the British Airwaysbadly and there are some constraints which do well for the business. Since

modern business is globalised, both national and international economy will have

its implication on the business of BA. The prices of petroleum increased due to

the economic budget, various airlines organisation are adversely affected by this

economic behaviour. According to the European commission president, the GDP

is going to be negative in the future for UK and European Unions. Public

spending have been low in 2010 and the variation in the VAT almost 3 times a

year causes a huge fluctuations in the turnover for BA. Recovering of economy

mainly depends on the reaction of pound value in coming years.

Social and Cultural Factors:Forces which are mainly focused within the society are neighbours, media,

family, friend and colleague. These forces have impact mainly on individual’s

attitudes and mental health, it is so much important for an organisation to keep

the people in the society with a positive attitude. There are two major periods of

recession one in 1980 and in 1991, but the recent one is in 2010 which is 7.1 %.

Due to recession, British Airways has to execute more job cuts. Most of the

European nations and UK consist of more aged population which enabled BA to

introduce more offers which attracted more customers for flying.



Technological Factors:

Investment in information technology and for the purchase of latest

technologies is the key factor for the British Airways for their 20% increase in the

profit. The use of technology in more innovative manner allowed British Airways

to raise their level of quality in IT operations and also the cost is reduced. The

most changeable factors are technological factors. Implementation of new

technologies will create uniqueness amongst the rivals. The DAC IT combustion

systems were introduced by British Airways in their Boeing 777 is a result of

British Airways analysis for the need of technological change. The online check in

systems is the latest technological advancements introduced by British Airways

which attracted more customers due to ease of access and comfort in their

travel.

Porter’s Five Force Analysis:In 1980, Michel Porter wrote an article on an analysis which was later

named as Porter Five force analysis. This type of analysis is used to understandthe business structure of the tourism industry and it is considered to be most

powerful tool for strategic planning.

Fig 2: Porter’s Five force analysis [Ref : ]

Threats of New Entrants:

Threats of new entrants are low, since airline industry involves huge

investments no new organisations will come up with a new plan for business

establishment. The rules and regulation to be complied is too high and this

increased the fear factor. Aviation industry after 9/11 was dipping down,

passengers fear to travel due to the increasing terrorist’s threat. British Airways

is one of the largest airways in the world and it holds a firm position in UK’s

market and hence new entrants have to face failure if planning to establish a

new firm in UK.



Threats of Substitutes:

The threat due to new substitutes considering British Airways is low,

because the only substitutes that can pose a threat to BA is trains to European

nations, but it is overcome by cheapest flight tickets. The threat of substitutes

for long duration flights is nearly 0%, but there is a small percentage of threat for

domestic airline.

Bargaining Power of Suppliers:

Considering BA, the threat due to this factor is high, because the

dependency on the other Airbus or Boeing for aircrafts and if the supplier is

hiking price BA can’t do much about it. Since BT had an historic background,

priority is given to BA if there is any new changes by the air traffic authorities.

Bargaining Power of Customers:

Customers have got the highest bargaining power. Recession has badly

affected airline industry and also there are many airlines that can provide with

cheapest ticket fare. The flow used for British airways is differentiation strategy.

Industry Rivalry:

In the case of British Airways the threat possessed by industry rivalry is

very high because there are many operations which are very similar to other

airlines. Many airlines have started providing passengers with cheap tickets and

are offering the same services like BA. Long duration’s flights have to worry little

about the rivalry, because to the current time, BA has been holding a very strong

position in the market that no rivalry can overcome British airways.

FORCES STRENGTH(Level)

Threat of New Entrants Low

Threat of Substitutes Low

Bargaining Power of Customers Medium

Bargaining Power of Suppliers High

Competitive Rivalry High

Strategic Analysis for Microenvironment:

SWOT Analysis: The abbreviation for SWOT is strength, weakness, opportunities and

threats. This type of analysis is mainly used by any organisation for

understanding the various factors of a new economy that affects their business

developments. It has become one of the powerful and comprehensive tools instrategic planning; it is powerful because it uses the internal strength and access



the weakness of that organisation for plan formulation. By the end of this

analysis we can know the various levels of opportunities that emerge and

neutralising the threats involved for the smooth running of British Airways.

Summary of researches are formulated into various sections below,

Strength:One of the featured strength of any well established organisation is their

brand name as like British Airways; their brand name plays an important part in

their business. British Airways is regarded as one of the best service provider in

the entire airline industry. British Airways can fall under hospitality and tourism

industry, the tourism industry is mainly depending on the means of travel and

hospitality depends on the kind and quality of service provided. If a customer

needs to choose British Airways rather than any other airways, the quality of

different levels of operations should be at high standards particularly

hospitability services. Merger and acquisition strategies of British Airways is one

other key strengths, a recent merging with Iberia changed the global view onBritish Airways as the one of the largest airlines in the world. The financial size of

BA is one other key strengths of the organisation. BA has introduced many

loyalty programs for their customers, which attracted even more business travels

for choosing BA, the featured loyalty program ever introduced was British

Airways Executive Club.

Weakness:

Many reasons emerge for the failure of British Airways in various levels.

Most important weakness which affects the future growth of the organisation is

the number of strikes encountered in short period of time, this is due to trade

unions and a huge influence of political factors. It is in debt for pension by 3

billion pounds. As the fissures indicating strike rates scared many people and

lost their trust and reliability for British Airways. Latest technological innovation

and changes occur inside the business is faced with reluctance. Employee

relations in BA are poor due to emergence of trade unions. As a plan of cost

effectiveness the job cuts made in some particular periods are shocking and lost

the trust from the public. Flight rates comparatively are very high, where in the

market due to high number of competitive rivalries cheapest rates are available.

In the management sides there are many roles which are unnecessary to the

organisation, this will increase the spending. There is a lack of proper

management which was proved by BA in 2006/2007 where the airways were

responsible for the loss of luggages of many passengers.

Opportunities:

The huge development of BA through various levels which then are named

in the industries as 1 star, 2 star, 3 star, 4 star and 5 star according to the

quality of services, which paved the way for a new audit system known

SAQA(Skytrax Airline Quality Audit) system. This system is globally accepted and

hence getting a good rating from this system was a challenge for airline

industries. BA as it always delivers high standards of service; new markets were

formed due to failures of competitors in deliverance of reliability. Merging withIberian airline, British Airways was able to introduce 200 more flight destinations.



Threats:

Airline industry is a global market, the economy situation of national and

international countries are much depended by British Airways, so globalisation is

a threat to some extent. As he price of petroleum products is increasing in a day

to day basis British Airways will be struggling to provide economical flight

tickets. Airline market is very much competitive by providing cheapest flight

tickets which cannot be provided by BA due to cost it spends on business

operations. Union strikes which will have a direct impact on the turnover of the

business. Green environment maintenance is another major concern regarding

the regulations of airways, where the pollution check must be done round the

clock and maintained as such at all times.

Various Strategic Planning Models - An OverviewWe cannot define a particular model for an organisation, but providing

some information’s on how various kinds of model should be will helporganisation for developing their own planning models. So organisations can

select any one of the basic models and modifications can be made as the

business progress accordingly. Given below are various models which are basics

so that organisations can start their strategic planning process, it is also possible

to merge these models, at the end the only outcome of strategic planning

process should be a plan for achieving a goal. Five different models are

described below,

Basic Strategic Planning:

This kind of model is most useful for small scale organisation which neverused strategic planning process or analysis. Top level management sides are

responsible for executing these strategic plans. It is a process which includes,

Mission Statement

Selecting the goal of an organisation

To reach the goal certain strategies or approaches are chosen

Implementing the strategic approaches

Updating the strategies regularly is necessary

Goal Based Planning: The motive of every organisation in running a business should always be

like, set a goal and work accordingly to achieve the goal, so here plans for

execution are designed for reaching the organisation’s goal.

SWOT analysis

For prioritising issues strategic analysis are carried out

Strategic programs are designed



Mission of the organisation should be updated regularly

Establishing action plans

Operating Plan calendar for the year is developed

Funds are allocated to run the business in 1 year

Monitoring and updating of strategic plan is important

Alignment Strategic Planning Model:For the effective operation of a business various factors and parameters

have to align properly in the way it works and some fine tunings are made if

some are not in alignment. These alignments are made because factors which

run a business are interrelated.

The mission of the organisation is planned by group

Identification of plan which will work well

Identifying some fine tunings required

These tunings are included in the plan as strategies

Scenario Model: This model can be merged and executed with any other models.

Identifying issues of the organisation and planning the scenario accordingly to

overcome the issues comes under this model.

Identifying the forces of macro environment which effects the business

Many scenarios are planned for overcoming these forces of the

environment

Task under each scenarios are explained

Choosing the best scenario for the kind of changes occurred and

executing for securing the future of the organisation

Self-Organizing Planning Model: This type of planning is mostly used in many organisations. It is because

of it s structure which is self evolving as the business progress.

Using dialogue and story board techniques the cultural values of an

organisation are clarified

Every quarter of the business is evaluated for the introduction of new

processes

Conducting process updates is required since it is a naturalistic planning

process



Patience should be maintained and also entire focus is on learning rather

than applying methods

Plans for portraying stakeholders with the strategic plans

Risk Management – Objectives and PoliciesRisk management is one of the important objectives to be taken care of by

an organisation like British Airways. What it does is identification of potential

risk, several tools are used to evaluate them and necessary measures are put

forward in order to avoid such risks. British Airways has various risk

management programmes which aims at the unpredictable nature of fiancé

environments and all necessary methods are used to reduce the adverse effect

on the financial performance. The possible risk factors to BA are described

below,

Fuel Price Risk:British Airways as an organisation keenly watches various external risk

factors happening around it. Among them is one which is most important, the

risk in fuel price. The current economy is unpredictable and hence there will be

no control over the fuel price at present and in the coming future. Rise in fuel

price will affect the profit and equity of the organisation as well. For planning the

strategy to face the risk in fuel price rise, BA established a programme which

only focused on risk involving fuel price variation. This management programme

ensures the safety of British Airways against the risk of fuel price.

2010 2009

Increase/(decrease)

in fuel price

per cent

Effecton

profit before

tax£

million

Effecton

equity£

million

Increase/ (decrease

) in fuel price

per cent

Effect on

profit before

tax£

million

Effect on

equity£

million

30 4 432 30 15 301

(30) (11) (420) (30) (4) (337)

Table 1: Change in fuel price affecting the financial stands of British Airways

Foreign Currency Risk: The currency risk issues will be involved with revenue, purchases from

global market and borrowings from World Bank of an organisation. All this

currency related transactions are made with reference to currencies which are

US dollar, euro and Japanese yen and so the changes in the exchange rate does

matter British Airways a lot. One other reason for this is globalisation, scope of

the business has increased and so the need of resource and fund also raised

parallel to the growth of business then starts borrowing, purchasing form global



markets. This type of risk is managed well by British Airways by following some

simple policies.

Policy of matching against each individual currency mentioned above with

receipts and payments

By selling surplus convertible currencies

Liabilities which is substantial are kept simple within three of the currency

mentioned above

The future of the organisation is secured by Forward foreign exchange

contracts

Interest Rate Risk:British Airway’s debt in global market is immense and repayment will

always comes with repayment added with interest rates, so the rise in interestrates causes more economical distress to the organisation. Two main areas

where the changes in interest rates hits is shareholder`s equity and yearly

income statement of the company. The impact of interest is explained with an

example in which the interest rate is measured in points and what will happen to

two of most important factors if interest rates are varied.

Due to higher Group net debt, an increase of 100 basis interest points will

have unfavourable effect on the group income statement of 2 million pounds and

decrease of 50 basis interest points will have favourable effect of 1 million

pounds towards the group income statement.

Due to holding the deposit of cash in a subsidiary entity, the change in

group income statement is 10million pounds instead of £2 million and in the case

of decrease in 50 basis interest points the change in group income statement is

increased to 5 million pounds.

Credit Risk:Credit risk to BA is increased when the counterparty’s performance falls

even they are provided financial assets. This risk has to be minimised and the

plan introduced by British Airways is by reducing the credit limit available to

counterparties. Overall exposure limit is introduced to counterparties to reducethe risk due to various treasury activities like international currency transaction,

fuel hedging and depositing money in the market and also credit verification

procedures are introduced to the counterparties if they wish to trade on credit

terms.

Liquidity Risk: The liquidity risk management involves various steps like

Maintaining enough cash for business operation and interest-

bearing deposit



Making option for the fund availability from adequate credit

facilities

Ability to close the positions in the market

After British Airways has committed to borrowing facilities through to2016, the risk of downgrades due to adverse trading condition is reduced and

the impact on liquidity risk is made nil. Further Company’s plan of not using

overdraft facilities of 10million pounds at 2010 and also it has held undrawn and

uncommitted money market lines of 25million.

Capital Risk: The primary aim of capital risk management is to maintain the

standardisation of capital structure and also to optimise it; by doing this it is

possible to keep control of the capital cost. The management should also make

sure the organisation keeps running in order to satisfy share holders by

providing return and satisfy stake holders by providing benefits. Net debt is

considered as the % of total capital by British Airways and it is defined as

Net Debt = Total Borrowings + Finance Liabilities + Interest-bearing Deposits +

Overdrafts

Total Capital = Total of Capital + Reserves + Non-controlling Interests + net

Debt

ConclusionRunning an airline industry is going to be so tough in the coming years

which are a sure thing, but well established organisation British Airways should

have plans for facing the toughest challenges of future. Hospitality and tourism

industry of UK purely depends on the number of tourist arriving each year

through BA. British Airways will be able to do that since they invest huge fund

and manpower to analyse the factors which are major threats to the business

and necessary measures are taken for eradicating such threats. The process is

continuing one and hence the future of the company is in a secure position, but

may vary according to the new and critical upcoming challenges. Since therecession Britain economy is struggling for recovery, organisations have so much

planning’s for the recovery, among this fall the British Airways as well.

Various kind of analysis has led us to strategic option which can be used

at the time of threats and risk management. The strategic planning methods are

given below,

Improvement to People Processes

By SWOT and other kind of analysis it is clear that British Airways is

criticised for improper luggage handling, severe delays due to union strikes,



disappointment considering employment related disputes. So these all are

overcome by improving the people process management.

Improved Environmental Stance

From PEST analysis the factors concerning environments are causingtrouble to British Airways and it is necessary to improve the environmental

stance. The strategy focus is on the climate change bill which is beyond the

requirements of the regulations.

Improved Technological Stance

Customer whether looking for leisure travel or business travel is highly

influenced by the technological advancement and will get attracted towards the

airways which provide such advanced facilities. So it is necessary British Airways

should develop such technological features like improvement in the in-flight

service, increasing the long term revenues etc for attracting more customers.

Segment Focus:

The entire British Airways business is divided into various segments and

each segment is regularly checked and necessary steps are processed for further

development. For example business class is one segment; economy class is

other segment etc. So if there is any reduction in number of passenger or to

increase the current level of business class which is a segment which enables

the organisations to put more focus.

Broader Service Option:

The only method of reaching new heights in business with airline industry

is to extend the flight service to as many regions as possible, which will

automatically boost the economy and turnover of British Airways.

References:

A8.Strategy.03Jun

Documents

Transcript of A8.Strategy.03Jun