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Business Strategy Report

Assignment 2

15th August, 2015

Word Count: 0000

Prepared by:

Jessica Thackeray N9178732

Rachael Bradshaw N9106987

Steve Halpin N7204183

Luis Arguello N8823995

Tutor: Julienne Senyard

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Contents

Executive Summary ................................................................................................................................. 3

Scope Statement ..................................................................................................................................... 4

Strategic Issues........................................................................................................................................ 4

Business Strategy .................................................................................................................................... 4

Recommendations .................................................................................................................................. 5

International Market & Strategic Alliance .......................................................................................... 5

Withdrawal From and Entry In To Markets ........................................................................................ 6

Organisational Structure ..................................................................................................................... 8

Projected Effects of Business Strategy .................................................................................................. 10

Summary ............................................................................................................................................... 10

References ............................................................................................................................................ 12

Appendix 1 ............................................................................................................................................ 14

Appendix 2 ............................................................................................................................................ 15

Appendix 3 ............................................................................................................................................ 16

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Executive Summary

Following the review of an executive summary of strategic issues, Qantas has requested a comprehensive strategic plan. An in depth analysis of the most salient issues has been undertaken, to develop the most effective strategic plan for Qantas’ management consideration.

Qantas faces numerous difficulties in the current market environment. To improve Qantas position in the market, strategies have been developed for three of the most critical difficulties. Firstly, Qantas is struggling to achieve profitability in the international market, courtesy of competitor saturation. Secondly, Qantas and its subsidiary Jetstar appear to be targeted at similar market segments in the domestic market, creating an inefficient business model. Finally, the organisational structure of Qantas prevents the business from responding efficiently to the dynamic market environment and hinders the development of innovative solutions.

The overarching strategy proposed in this report, is to amend the positioning of Qantas and Jetstar in both international and domestic markets, to differentiate the business from its competition. Furthermore, it is recommended the business modify the corporate management structure, to allow the business to be more flexible in the fluctuating market environment.

The first component of the proposed strategic plan, is to reposition the Qantas brand within the international market. As a means of diversification from competition, it is recommended Qantas reposition its brand as a low cost, superior service airline. Furthermore, it is recommended the business develop international partnerships with established prestige airlines, with the intention of utilising the partners domestic market knowledge, and position itself as a budget alternative. This partnership will assist in the conservation resources and share the responsibility of risk management.

Following the international repositioning of Qantas’ brand, repositioning the brand in the domestic market is recommended, through the development of a business or premium economy flight service. This will differentiate Qantas from its own subsidiary, Jetstar, developing a more efficient business model.

Finally, to ensure Qantas maintains a sustainable competitive advantage, the corporate management structure must be altered. It is recommended that Qantas decentralise the mechanistic decision making power structures, to create a more organic organisational structure. By allowing the management teams of each of Qantas’ subsidiaries to operate more independently from the board of directors, the business will develop more efficient decision making, which is critical in a dynamic environment.

Following the implementation of these strategies, it is predicted that the business will achieve 20% revenue growth within three years. The business will also reduce operating costs by an estimated 10%. According to these predictions, Qantas will realise profitability in 2017, contrasted with the loss incurred in 2014.

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Scope Statement

Qantas has recently downsized its company as part of a restructuring plan aimed to reduce

costs and increase net profit (Knight, 2014). This report aims to assist Qantas in the

reduction of the current losses, progressing towards a net profit in the near future. The

overall strategy composed for Qantas focuses on condensing current operations and

reducing expenses to ensure a decrease in the total financial loss that the company is

currently experiencing.

Strategic Issues

A business strategy is the guiding principles that encourage the desired decision making

patterns when communicated and adopted within the business (Watkins, 2007). It therefore

relates to how people in the business should make various decisions and assign resources

with the goal of achieving the key objectives (Watkins, 2007). The strategy comprised for

Qantas analyses and prioritises three strategic issues that were identified as contributors to

Qantas’ overall loss on their financial reports (Qantas, 2014). The first identified issue is the

lack of profitability on an international scale. Qantas is faced with competition from all over

the world, and needs to find a point of difference to gain sustainable advantages over its

competitors. Secondly, Qantas and their subsidiary company Jetstar are competing against

each another in the Australian domestic market. According to Appendix 1, Jetstar is

capturing the larger profits in the domestic airline market, therefore Qantas should re-

evaluate their target market to ensure that they are not competing with their own company

in the same market. Finally, Qantas is faced with a dynamic market environment, which is

constantly forcing Qantas to modify its existing strategies.

Business Strategy

The strategy proposed by the team is to alter the positioning of Qantas in the Australian

market to service a mid-high class demographic, and to reposition the company as a low

priced international airline. This will address the issue of competition between Jetstar and

Qantas in the budget market, while encouraging Qantas to focus on repositioning the

company as a business class airline. In addition to this, a change in the corporate

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management structure is necessary to allow the business greater market responsiveness,

thereby reducing the destabilising effects of a dynamic market environment.

Recommendations

International Market & Strategic Alliance

The first element of Qantas’ strategy to be improved is the operation at an international

level. According to sales reports in Appendix 1 it is evident that the international operations

of the airline have significantly contributed to the loss in total sales revenue. Research

indicates that airlines such as Emirates and Singapore Airlines (Creedy, 2012), Cathay Pacific

(O’Sullivan, 2013), and British Airways have the greater market share, therefore Qantas will

need to consider these companies in its attempt to increase its market share and revenues

at an international level with this strategic plan.

In order to maximise Qantas’ international sales potential the organisation should take into

consideration various aspects of Porter’s Five Forces, including its competitors mentioned

above and the buying power of customers (Porter, 1979). It is recommended that Qantas

take a resource based view to gain competitive advantage in the market, while

understanding that competition is not simply manifested solely in the other entrants, but is

determined by the underlying economics as well as various other competitive forces

including suppliers, threat of potential entrants and the lack of substitute products (Porter,

1979). The company has the resources to provide the required services at an international

level, and also has the capability to do so. Therefore Qantas should combine these with its

distinctive competencies of quality, efficiency and customer responsiveness to provide a low

cost, superior service to the international market, specifically in countries with a large travel

culture such as the United Kingdom, America and Europe (Traveller, 2014). It is

recommended that Qantas create strategic alliances with an airline currently based and

operating in a target location such as America or England, which currently positions their

airline as prestige, of high quality, reliable and customer focused (Qantas, 2015). This would

allow Qantas to utilise its allied country’s knowledge of the market to then position itself as

a budget alternative to its superior alliance. It would also help both firms to conserve their

resources, and share any risk that became evident (Eisenhardt & Schoonhoven, 1996). A

revenue share agreement would be recommended to ensure that both companies are

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benefiting from the alliance in regards to profits and revenue. In doing this, Qantas could

create value for its customers by providing a competitive or cheaper ticket price than its

competitors as a price leadership strategy without sacrificing its renowned superior level of

customer service. Qantas could use reverse positioning to redefine its dominant offering of

moderate-high cost for superior quality to reflect a lower cost service which continues with

superior service. Qantas has evidently been successful when offering this to Australia

through Jetstar (see Appendix 1), the strategy of which can now be implemented on a global

scale. This would encourage a growth in Qantas’ international market share, as international

customers are becoming increasingly budget conscious. Buying power, of Porters Five

Forces (Porter, 1979), is a significant element for Qantas’ consideration as customers

determine the number of sales and resulting profits. Qantas must communicate, to

potential customers, the value proposition of its services.

This change at a business level allows Qantas to reposition itself within the international

market. Qantas would also require strategic changes at a corporate level, due to the

withdrawal from the mid-high cost airline market and entry into the budget international

market. Qantas must also alter its international strategies, to compensate for the

replacement of its existing strategies with the production of a budget international airline

carrier, partnered with a high-cost domestic airline.

This strategy would benefit Qantas as it attempts to maximise profits by gaining market

share. It is estimated that the small profits made from each sale will build to overtake the

profits of Qantas’ current sales in the international market, reflected in Appendix 1. This is

estimated to take 3-5 years to become a significant success, as the profits will increase from

year to year as the market share grows. The main challenge is securing the required

strategic relationships and operating the new strategy to create a profit.

Withdrawal From and Entry In To Markets

The second critical strategic issue is ensuring that Qantas is targeting the appropriate

domestic market segments. Qantas would benefit by changing their corporate level strategy

by withdrawing from the budget domestic market in which Qantas currently trades and

entering into the business class or premium economy market. This allows Qantas’ subsidiary

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company Jetstar to continue their focus on the low-priced air fares and allows Qantas to

attract a higher demand in business, and mid-high class travellers resulting in an increased

profit margin. Currently Qantas offers only economy classes to regional areas, with all other

flights offering business class and economy class (Qantas, 2015). The new business strategy

encourages Qantas to focus on increasing their customer service, in-flight services and plane

conditions to provide one premium class experience and with the fair of a standard flight.

Porter’s five forces allows Qantas to analysis their external micro environment and

understand how each element affects their organisation (Grant, et al. 2014). There is a very

minimal chance of new entrants into the airline industry as the expense to start a new

airline is quite high. Porter identifies the difficulty of market entry as one of the five forces

that affect a business’ external micro environment (Porter, 1979). This allows Qantas to be

flexible with their offerings, Qantas also has no substitute threats as an aircraft is the easiest

method, and in most cases the only method, of transport other than boats or trains which

are time consuming when traveling some distance. To be successful at implementing a new

corporate strategy Qantas will need to ensure that they can obtain enough resources from

their suppliers to provide a higher level of service to customers at all times and ensure they

penetrate the market at the right stage.

On a standard timetable business class is offered less frequently than economy flights

(Qantas, 2015). This is likely to be caused by a lack of demand, therefore Qantas only

requires a certain amount of flights per day. Qantas will need to adapt their marketing

scheme with a higher end business appeal to attract new customers while still retaining

their current business class customers. By changing the Qantas advertising campaigns the

company can add value in the minds of their customers by emphasising the high quality of

service and facilities when flying with their company. To target a new market Qantas could

offer double Qantas frequent flyer points for business class flyers for their first three trips to

entice new customers to try business class whilst receiving rewards. A positive experience

by customers would lead to positive word of mouth to other potential new customers.

Furthermore, Qantas should personally contact large corporations and offer corporate

specials when flying for work purposes, encouraging more new customers to fly and

experience the business class of Qantas at the price of the current regular flights.

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This strategy would benefit Qantas by allowing them to profit from a new target audience in

business class and not compete for customers in the same low – cost industry as their

subsidiary company Jetstar. Qantas will be able to increase their profit margins as more

consumers take advantage of their business class deals which will help Qantas increase their

profit over the five year target. The challenges for this will be implementing the new

strategy and ensuring it is executed correctly to target the new audience.

Organisational Structure

The current environment in the aviation industry is dynamic. Competition, along with

external environmental factors such as oil pricing, are constantly forcing Qantas

management to modify existing organisational strategies.

In such an environment, it is imperative that Qantas has the capacity to respond quickly to

potential threats and opportunities. Similarly, it is crucial that Qantas develop innovation

initiatives as a means of diversification. To achieve this sustainable competitive advantage,

Qantas must improve the existing organisational structure within the Qantas management

hierarchy.

Organisational management structures generally consist of mechanistic and organic forms.

The mechanistic forms maintain the vertical management chain, allowing for effective

organisational coordination. The organic forms decentralise the decision making power,

resulting in more market responsiveness, cultivating innovation (Grant, et al. 2014).

Aiken and Hage found that the decentralisation of decision making relates to the

development of innovation (Aiken & Hage, 1971). Phil Kotler highlights the need for

innovation, calling it ‘the only sustainable competitive advantage’. (Kotler & Armstrong,

2010). In addition to these findings, Burns and Stalker concluded that organic organisational

structures are more appropriate for business environments that are constantly undergoing

change (Burns & Stalker, 1961).

To achieve a sustainable competitive advantage, it is recommended that Qantas shift

elements of its organisational structure towards a more organic form in order to accentuate

its capacity for innovation and its responsiveness to the dynamic business environment.

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In order to improve the responsiveness or strategic decisions, Qantas management

organisational structure should be decentralised to allow for a more flexibility and power

within market based units in the organisational hierarchy. Mintzberg identifies this structure

as the ‘Divisionalized form’, illustrated in figure 1 (Mintzberg, 1980). In this structure, the

strategic apex comprises of the top level management of the organisation. The middle level

includes management who link form a chain of command between the strategic apex and

the operating core.

Figure 1: The divisionalised form

Source: Mintzberg, 1980

Mintzberg postulates that by drawing power to the middle line from the strategic apex, the

middle line can achieve autonomy and spilt into separate coordinated market based units

(Mintzberg, 1980). The structure enhances horizontal decentralisation within the middle

line, granting a greater magnitude of decision making power, thus improving the

organisations ability to respond quickly to each unique dynamic market environment.

Conversely, the structure limits vertical decentralisation, allowing organisational strategic

decisions to reside within the strategic apex.

The practical application of the divisionalised organisational structure for Qantas, requires

several minor changes within the management hierarchy. In the existing structure, the

strategic apex reserves decisive power. This limits strategic decisions to be made within the

board of directors. While this is ideal for organisational decisions which require a

mechanistic approach, it fails to allow for improvisation and responsiveness to a dynamic

market environment.

The business should shift decision appropriate making responsibilities towards the middle

line which, in Qantas’ case, is the management teams at the forefront of each Qantas

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subsidiary. This will allow these subsidiaries to take decisive action in time critical

circumstances, without needing micro management from the board of directors.

While the implementation of this structure is theoretically proven to improve the business

operation, changes of this magnitude can be expensive and time consuming. However, this

structure will provide Qantas a sustainable competitive advantage in a highly competitive

environment.

Projected Effects of Business Strategy

Using Qantas’ consolidated income statement in Appendix 2 it is evident that a loss is

currently being incurred by the company (Qantas, 2014). Implementing the strategic plan

will allow Qantas to regain market share over its domestic and international competitors

and record an estimated increase of 20% in revenue over the next three years. Following the

integration of the proposed organisational structure, the business is expected to reduce

operating through the development of greater efficiency and innovation. It is estimated that

a 10% decline in operating costs will be evident over the next three years, aside from that of

wages, where this expense will be held constant. Appendix 3 reflects the predicted profit

and loss at June, 2017 showing increases in revenues and a decrease in expenses. If the

strategy were to prove successful and be continued in the years following, Qantas would be

making a profit by 2017, rather than the loss currently reflected on the 2014 income

statement. Appendix 3 reflects the projected profit for Qantas by 2017 based on the

predictions of a 20% increase in sales and a 10% decrease in expenses.

Summary

This report outlines three key strategies for the consideration of the Qantas board or

directors. The first, is a repositioning of the Qantas brand on an international scale, to

differentiate the brand from its competitors. The second, is a repositioning of the Qantas

brand on a domestic scale, to differentiate itself from its own subsidiary, Jetstar. The final

recommendation, is the decentralisation of decisive power, encouraging responsiveness to

the market environment and the development of innovative solutions. The implementation

of these solutions is expected to increase revenue by 20% and reduce operational costs by

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10% within three years. Following the implementation of these strategies, Qantas should

anticipate market and financial growth by 2017.

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References

Aiken, M., & Hage, J. (1971). The organic organization and innovation.Sociology, 5(1), 63-82.

Burns, T. E., & Stalker, G. M. (1961). The management of innovation.University of Illinois at

Urbana-Champaign's Academy for Entrepreneurial Leadership Historical Research Reference

in Entrepreneurship.

Creedy, S. (2012). The Australian. Retrieved from

http://www.theaustralian.com.au/business/aviation/qantas-fails-to-keep-pace-with-

competitors/story-e6frg95x-1226389493227

Eisenhardt, K. & Schoonhoven, K. (1996). Resource-based View of Strategic Alliance

Formation: Strategic and Social Effects in Entrepreneurial Firms. Organisational Science, 7

(2) 136-150. Retrieved from

http://disciplinas.stoa.usp.br/pluginfile.php/230540/mod_resource/content/1/Resource-

based%20View%20of%20Strategic%20Alliance%20Formation.pdf

Grant, R., Butler, B., Orr, S. & Murray, P. A. (2014). Contemporary Strategic Management:

An Australian Perspective, (2nd Edition). John Wiley and Sons Australia, Milton, QLD. ISBN

9781118362556

Knight, E. (2014). Qantas flies into yet more trouble. Retrieved from

http://www.smh.com.au/business/qantas-flies-into-yet-more-trouble-20140513-387r8.html

Kotler, P., & Armstrong, G. (2010). Principles of marketing. Pearson Education.

Mintzberg, H. (1980). Structure in 5's: A Synthesis of the Research on Organization

Design. Management science, 26(3), 322-341.

O’Sullivan, M. (2013). Sydney Morning Herald Business Day. Retrieved from

http://www.smh.com.au/business/competitors-combat-qantas-alliance-20130503-2iwxi.html

Porter, M. (1979). How Competitive Forces Shape Strategy. Harvard Business Review. 137-

145. Retrieved from http://faculty.bcitbusiness.ca/KevinW/4800/porter79.pdf

Qantas. (2014). Qantas Investors Annual Report 2014. Sydney: Qantas. Retrieved from

http://www.qantas.com.au/infodetail/about/investors/mediaReleaseResults14.pdf

Qantas. (2015). Our Company. Retrieved from

http://www.qantas.com.au/travel/airlines/company/global/en

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Traveller. (2014). The world’s biggest travellers – which nationality takes the most trips.

Retrieved from http://www.traveller.com.au/the-worlds-biggest-travellers--which-

nationality-takes-the-most-trips-11979j

Watkins, M. (2007). Demystifying Strategy: The What, Who, How and Why. Retrieved from

https://hbr.org/2007/09/demystifying-strategy-the-what/

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Appendix 1

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Appendix 2

Source: Qantas, 2015

http://qantas2014.reportonline.com.au/annual-report/financial-report/financial-statements

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Appendix 3