Strategic Airline Management 1:Strategies

Dr Narudh Cheramakara

2/2017

Bangkok University

1. Strategic Management

• Strategic management is the formulation and implementation of the major goals and initiatives taken by a company's top management on behalf of owners, based on consideration of resources and an assessment of the internal and external environments in which the organization competes.[

1. Strategic Management

• Strategic management provides overall direction to the enterprise and involves specifying the organization's objectives, developing policies and plans designed to achieve these objectives, and then allocating resources to implement the plans

• Michael Porter identifies three principles underlying strategy: creating a "unique and valuable [market] position", making trade-offs by choosing "what not to do", and creating "fit" by aligning company activities with one another to support the chosen strategy.

2. What’s strategy?

. Alfred Chandler 1962 "Strategy is the determination of the basic long-term goals of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals."

Michael Porter defined strategy in 1980 as the "...broad formula for how a business is going to compete, what its goals should be, and what policies will be needed to carry out those goals" and the "...combination of the ends (goals) for which the firm is striving and the means (policies) by which it is seeking to get there."[

2. What’s strategy?

Mintzberg (1988) concludes that there are five types of strategies:

• Strategy as plan – a directed course of action to achieve an intended set of goals; similar to the strategic planning concept;

• Strategy as pattern – a consistent pattern of past behavior, with a strategy realized over time rather than planned or intended. Where the realized pattern was different from the intent, he referred to the strategy as emergent;

• Strategy as position – locating brands, products, or companies within the market, based on the conceptual framework of consumers or other stakeholders; a strategy determined primarily by factors outside the firm;

• Strategy as ploy – a specific maneuver intended to outwit a competitor; and

• Strategy as perspective – executing strategy based on a "theory of the business" or natural extension of the mindset or ideological perspective of the organization.

3. Strategy examples for airlines

• ‘Our strategy is to be the lowcost provider.’

• ‘Our strategy is to provide unrivalled customer service.’

• ‘Our strategy is to be number one or number two in all our markets.’

3. Strategy v Strategic

• But what is ‘strategic’? The word has been devalued, often being used as a synonym for ‘important’. To be truly ‘strategic’ an action must reinforce or change one or more of the following:

1. The scopeof the corporation’s port folio of businesses

2. The value offer to customers

3. The competitive advantage

4. Operating strategy

3. The field of strategy: I Boundaries of the Firm• Industrial scope of decision: The decision addresses wchih businesses

a corporation should be investing its resources in.

1. Single Business – Airline Only

Most of airlines starts from this point and realise that they wish to expand outside of a single business as the industry is high-risk, capital intensive and prone to external factors

3. The field of strategy: I Boundaries of the Firm1. Portfolio of Related Businesses – with divisions, subsidiaries, joint

ventures related to air transport

IAG Group, Air France-KLM, Thai Group, Etihad

3. The field of strategy: I Boundaries of the Firm3. Portfolio of unrelated business : Brand Ecosystem – Nok Air also heading to this direction

Traditional Scopes

- Hotels

- Holidays (Thai law prevents

Airlines from doing this directly)

- FFP

4. The field of strategy: Strategic Position and Resources- Every carrier needs to identify how and which market it will choose to

enter and position (Same is true for every business; unless you are a utility company). The reasons are underlined under one central issue ‘how to build competitive advantage and outperform the competitors’?

- Competitive Advantagethe attribute that allows an organization to outperform its competitors. A competitive advantage may include access to natural resources, such as high-grade ores or a low-cost power source, highly skilled labor, geographic location, high entry barriers, and access to new technology.- Nok Air: Friendliness, Q400, Monopoly Routes, etc.- Competitive advantage in one market can be a hindrance in another (Q400

for MAQ v NNT )

4. Competitive Strategy: I. Horizontal Scope,

• Horizontal Scope: Which markets should we compete? – Geographical + service markets

1. Geographical Scope

A. Wide-market

– There are large international airlines but rarely a truly global carriers (EK, QR, EY, TK are attempting) Alliance helps to a degree for global presence.

+ Most international network carriers

B. Niche – Small number of grographical markets – Regional Carriers, PG, London City Airport, CityJet. REX, BMI British Midland, Icelandair

4. Competitive Strategy: I. Horizontal Scope,

2. Service Market – Segmentation within the geographical markets (through the combination of products and price)

A. Wide-market – A portfolio of pax and cargo services through one main company. This could also be through subsidiaries, divisions or sub brand

B. Niche – Single type of service, at very narrow range. I.e. Charter, All business class airline

4. Competitive Strategy II: Customer Value

4. Competitive Strategy II: Customer Value

• Value-for-money

• Willingness-to-pay

• Customer’s value doesn’t necessary derived from the Price

• But this is true for products/service

• ความคุ้มค่า v ราคาถกู

4. Competitive Strategy II: Customer Value

An airline offers better value relative to competitors if and when

1. Lower price – at fewer benefits (LCCS)

2. Lower price – at similar benefits (SQ/EK), SL/DD

3. Unique benefit at the same price (PG v TG)

4. Unique Benefits at premium price (SQ premium class, EY Suits)

Acceptable Perceived Value Curve: Price v benefits)

A = Service B = Price

C = Better benefits/lower price than A (EK)

D = Also charging for premium (e.g. SQ)

4. Competitive Strategy: Competitive Advantage• What can we do that other airlines can’t do as well or as cheaply?

• Cost Advantage

• Service Advantage – Differentiation – only work if customers are willing to pay for premium

• What do you think about airline industry? What are the competitive advantage of Air Asia? Emirates?

5. Business Model

• A description of the value the company delivers to targeted customers and how it configures resources internatlly and externally toachieve this, there are 2 elements;

• A revenue model: How revs are earned

• A cost model; How the process is being done,

For airline industry:

1. Legacy model – full service revenue model, outdated cost model

2. LCC- NO-frill revenue model, lean cost model

We have seen rapid change in airline business model particularly since the deregulation in 1978

5. Business Model: Why it is changing?

5.1 Market liberalisation

- Freely competitive

- Price-driven – fare war

- Started in the US in 1978

- EU-single market case: no cabotage

- Thailand openskies policy started in 2001, sees the vast in crease in the operators/choice/ price comes down.

- Good for consumers – not so for the operators

- https://www.youtube.com/watch?v=uQ9SlOUBvqQ

5. Business Model: Why it is changing?

5.2 The internet

- New distribution method

- The dead of travel agency

- The rise of OTA

- Easier to get info/easier to travel – doubled aged sword (customers can al easily access other airlines, bring the price pressure again)

- Think of Pantip posts on going to Japan for 13K, etc. Price expectation sometimes govern by the social media. too

5. Business Model: Why it is changing?

5.3 Advance in aircraft technology

- Reliability

- Shorter turn around time

- ETOPs

- Most of this aim at the operating at a lower cost, not faster anymore

History: The Flying Public (60s-80s)• Safe and reliable

• The Jet Age

• Sexual Appeal

• The Jumbo jets – Unit cost

• The deregulation – Free competition

• Oil crisis – cartel

• The rise and fall of Concorde – Govt spending

• The fall of British jets – Govt intervention

• The charters – unit cost

https://www.youtube.com/watch?v=v9bVFkDhGPE

5. Business Model: Why it is changing?

This bring about in the blurring line between LCCs/FSCs (AF example)

5. Business Model: Consolidation

Why?

Economies of scales

Synergies

Thailand? Any chance?