British Airways (BA): Corporate Strategy - Essay Example

?British Airways (BA Corporate Strategy Introduction British Airways (BA) is the flag carrier airline based in Waterside in the United Kingdom. In terms of international destinations, international flights and fleet size, British Airways is the largest airline in UK whereas it is ranked as the second largest UK airline based on passengers carried. This paper will explain the products and/or services offered by the British Airways and the firm’s geographic scope of operation. The paper will also conduct a critical internal and external analysis of the British Airways using theoretic models like SWOT analysis, PESTLE analysis and Porter’s five forces model. An overview of the British Airways As mentioned in the introduction, the British Airways was actually formed to control two major nationalised airline corporations, namely BOAC and BEA. Currently, the British Airways has nearly 150 destinations, among which six are domestic destinations. The BA is one of the few airlines that have destinations in all the six inhabited continents. BA CityFlyer, the wholly owned subsidiary of BA, operates flights across 20 destinations throughout Europe. Although it has been giving particular focus to financial market, BA CityFlyer has recently gained notable achievements in leisure market too. In addition to managing domestic and international flights, the BA offers many other services such as hotel and car facilities (British Airways, n. d.). The airline also offers better entertainment experience like London Pass, Madame Tussauds and Beyond London; and BA has a range of holiday packages in order to provide its passengers with better service experiences (ibid). The British Airways’ main hub is located at London Heathrow Airport, which serves the whole United Kingdom and is the world’s third busiest airport. Hence, the advantage of geographic location contributes to BA’s scope of operations. SWOT analysis SWOT analysis is an apt tool for analysing the firm’s internal management strengths and weaknesses as well as external management opportunities and threats. Strengths Vast international operations and a strong global presence constitute the major strength of the British Airways. From a strategy standpoint, this strength would assist the organisation to spread risk elements and take advantages of emerging opportunities in the global airlines industry. Strong operating performance is another crucial strength of the company as it benefits the company to survive stiff market competition and thereby enhance market share growth. Strategically, high employee productivity greatly assists BA to dominate the UK airlines industry because employee productivity is an element directly influencing the overall organisational productivity. Weaknesses BA experiences a low rate revenue growth from its key geographic regions and this situation really threatens the long term sustainability of the company. In addition, the company struggles due to high debt burden. Undoubtedly, the recent global recession worsened the debt status of the company and impeded the company’s growth rate. Another major weakness of BA is that it faces severe competition from Cash Rich Middle Eastern Airlines. As a result of the intense competition, the company loses its market share to its competitors. As per reports, in order to improve its debt level, BA plans to cut over 4,5000 jobs, and this policy is likely to impact the operational efficiency of the firm (Thomas & Ebrahimi 2012). Opportunities The explosive growth of global travel and tourism industry over the last few decades offers potential opportunities to BA. Today, people visiting global tourist destinations are increasing tremendously and this trend would offer a prosperous future for the organisation. The growing air cargo industry would also assist BA to achieve its long term goals because the firm operates a well established air cargo subsidiary. The EU-US aviation agreement also appears to be fruitful opportunity for BA because majority of the world’s famous cities and tourist destinations are located in United States and Europe. Threats Rising aviation fuel prices is found to be a potential challenge to BA. As of the 2011 data, fuel costs account for nearly 29 percent of the total operating costs of the airlines industry whereas it was 26 percent in 2010 (Greenair, n. d.). The rising fuel costs adversely affect BA’s efforts to improve its debt status. In addition, increasing competition from low cost airlines also raises potential challenges to the long term objectives of the British Airways. Evidently, the current economic slowdown in the US and EU extremely affects the growth initiatives of the company. Porter’s five forces model Porter’s five forces model is a framework developed by Michael E. Porter to evaluate the microenvironment of an organisation. Degree of rivalry BA operates both long haul and short haul flights. In case of long haul flights, BA and its competitors offer almost same facilities in terms of price and service offering. Hence, BA cannot effectively differentiate its services from those of its competitors and hence the organisation struggles to maintain loyal customers. The short haul market is fragmented as there are many small players that are capable of delivering improved services to passengers at affordable rates. Increasing mergers and acquisitions among airline companies enhance the competition intensity in the airlines industry. In short, BA faces high degree of competitive rivalry. Threat of new entrants There are a number of potential barriers to new entrants. First, the intense competition in the airlines sector makes it very difficult for new players to enter the industry. Second, high regulatory requirements and huge entry costs discourage new entrants. In addition, there are several significant barriers to exist in place and this condition also reduces the scope of new entry. Finally, the recent failure of some major airlines such as XL and Zoom is likely to daunt the new entrants. Therefore, threat of new entrants is low in the airlines industry. Threat of substitutes There are few direct substitutes for BA because no potential alternative to air travel has been invented. In case of short haul flights, Eurostar or a ferry can be opted as a substitute even though those services can never be an effective alternative to air travel. Hence, threat of substitutes is very low in the airlines industry. Buyer power In case of air travel, passengers do not obtain an opportunity to purchase services in bulk and hence they have little bargaining power. Since there is no close substitute to air travel, people do not have any better option to travel long distances within minimum possible time. It is identified that all the airline companies including BA offer almost same price structure and hence passengers cannot bargain much. Furthermore, people are ready to choose air travel whatever the price is. However, today people have increased awareness about even small airline price variations due to the greater popularity and accessibility of the internet. Hence, bargaining power of buyers is moderate for BA. Supplier power The excessive bargaining power of suppliers raises potential challenges to British Airways. There are no numerous potential aircraft manufactures in the industry and hence it is very difficult for BA to change suppliers. In addition, supplier switching cost is high in the airline industry. From a strategic perspective, the process of supplier switching can have serious impacts on BA’s operational management efficiency. Therefore, it can be concluded that supplier power is high in the airlines industry and this situation reduces the viability of BA. PESTLE analysis The PESTLE analysis gives a clear view of the macroenvironment of the organisation and hence the potentiality of its business. Political factors While analysing the airlines industry, it is clear that air travel is always affected by the country’s political environment. The United Kingdom has stable political spectrum. Reports show that UK political parties do not support liberalisation of aviation policies since the 9/11 terror attack in the US (Butcher 2011). The government introduced rigorous restrictions regarding air travel security after the 9/11event, and this political condition significantly impacts the business of BA. At the same time, the UK government warmly welcomes foreign companies and other investment projects in order to overcome the adverse impacts of the recent recession and to stabilise the nation’s economic growth. This business-friendly environment may promote the growth of BA. Economic factors The recent global recession dreadfully affected the UK economy and this issue naturally downgraded the scope of air travel. As a result of the recession, UK’s GDP decreased and there was a decline in people’s annual income. In order to manage this adverse economic condition, people preferred low cost airlines to full service airlines and this practice noticeably reduced BA’s business volume. Reports indicate that the recession notably increased the cost of air transport in UK mainly due to growing oil prices (UK Aviation Forecasts 2011). From a strategic view point, the lower consumer spending in UK experienced over the last few years significantly reduced the demand for air transport. Social factors According to the findings, UK has an ageing population; nearly, 10 million people in UK are over the age of 65 (UK parliament, n. d.). Obviously, older generations are likely to spend more time on leisure activities like visiting international tourist destinations. Hence, the UK’s ageing population raises potential growth opportunities for the BA. UK’s growing unemployment rate also contributes to BA’s business sustainability. The high unemployment level in the country would provide BA with increased bargaining power as an employer. In strategy terms, this situation may benefit the organisation to cut down its employee costs. Technological factors Since UK is a technologically well developed country, people have increased access to the internet. Surveys reveal that a notable percent of UK people uses internet to compare airline prices and thereby choose most affordable service providers. Hence, the increased popularity of internet in UK may increase the bargaining power of buyers. Today, the airline industry largely depends on technological innovations such as online ticket booking and check-in services so as to serve the clients better. Although application of such improved technologies may assist BA to serve the passengers more conveniently, over- reliance on technology would cause troubles to elderly population that may not be much familiar with new technological developments. Legal factors Evidently, the legal landscape can have a significant influence on the airlines industry. The UK government has recently redefined the age limits of pilots and cabin crew. In UK, upper age limit for pilots is 60 whereas it is 65 for the cabin crew (Butcher & Keter 2011). This high upper age limit notably increases BA’s wage bill and hence reduces the firm’s profitability. In addition, activities of trade unions impede the business growth of British Airways. Recently, the company has struggled with trade union strikes and such issues raise potential challenges to the firm’s future. In addition, extreme legal regulations on customer rights would cause huge losses to BA in the events of flight delays or cancellations. Environmental factors Today, people worldwide, particularly Europeans, are increasingly concerned about environmental impacts of various businesses and developmental projects. Hence, they would not encourage businesses that would not promote environmental sustainability. In addition, the UK government has formed strict regulations on noise pollution and energy consumption. As a result, BA cannot continue its operations successfully in UK unless the organisation completely adheres to the environmental regulations set by the UK government. Strategic evaluation The SWOT analysis clearly indicates that mounting fuel prices and stiff competition from low cost airlines are the major threats to the BA. However, the company possesses a set of competitive strengths such as global presence, strong operating performance and high employee productivity to outweigh those challenges and to take advantages of emerging growth opportunities. The Porter’s five forces model suggests that the high buyer power and extreme competitive rivalry are the major microeconomic factors challenging the long term sustainability of BA whereas other factors like buyer power, threat of new entrants and threat of new substitutes contribute to the future growth of the organisation. It is observed that the macroeconomic environment of BA does not support the firm’s business operations much. The economically sluggish UK economy together with rigorous governmental regulations on air transport raises a set of potential challenges to BA. In addition, employee strikes also reduce the operational efficiency of BA significantly. These analyses point to the fact that BA is greatly threatened by some serious strategic issues. Excess debt burden is the major strategic issue challenging the operational efficiency as well as long term sustainability of the organization. The company was not strategic in setting a safe debt level and this internal weakness together with the 2008 global financial crisis raised severe challenges to the organization. As a result, BA is struggling extremely hard to raise funds for fuelling its growth activities. In addition, growing competition from low cost airlines exacerbates the financial difficulties of BA and therefore the firm’s plan of increasing its revenues by expanding the business has so far failed. In order to resolve this financial difficulty and regain the operational efficiency, the company plans to cut many jobs. Naturally, job terminations may lead to employees-management conflicts or strikes and the situation may worsen the market status of the company. Undoubtedly, these strategic issues would hurt the long term interests of BA unless the management pays immediate attention to those issues. Recommendations It is advisable for the company to offer an attractive price structure to its passengers as price is paramount in the modern airlines industry. In addition, seasonal offerings and other improved holiday packages would better assist the company to survive the intense market competition. In terms of strategy, the practice of business mergers and acquisitions would assist BA to broaden its market horizon and hence to spread the elements of risk. Therefore, it seems that BA’s current operations are strategic. Referring to the changing market environment, a total restructure of the firm’s corporate strategy is essential to update the business with respect to the changing modern business environment. Referring to the view of Wit and Meyer (2010, p.596), BA management has to be up to date with recent trends in the business environment in order to identify in a timely manner strategic needs in the supply chain and to deliver improved services to clients. BA must be vigilant while forming and implementing their corporate strategies, because “the design of organisational structure and management form key components of strategy implementation” (Grant 2010, p.175). Therefore, BA’s management has to give specific attention to the firm’s organizational structure and management approaches while making changes to their corporate strategy. Conclusion From the above discussion, it is clear that British Airways has numerous potential competitive advantages to dominate the UK’s airline industry despite current global market challenges such as mounting fuel prices and economic recession. The company can successfully confront its competitors by offering an attractive price structure to clients. In addition, strategic application of technological innovations can benefit BA and enable it to gain an edge over its British market rivals. Social factors, particularly an ageing UK population, would greatly assist the organisation to enhance its future market growth. Excess debt burden and possible employee resistance to job cuts are the major strategic issues identified in the organization. Referring to the changes in the global market environment, a corporate strategy restructure is recommendable for BA to greatly take advantages of emerging market opportunities. While planning the corporate strategy change, the organisation has to give specific focus to strategy formulation and implementation phases. References The ageing population. UK parliament website. Available at http://www.parliament.uk/business/publications/research/key-issues-for-the-new-parliament/value-for-money-in-public-services/the-ageing-population/ [Accessed 24 Nov 2012]. Butcher, L. (2011), Aviation Security. House of Commons. Butcher, L & Keter, V. (2011), Aviation: Pilots and Crew. House of Commons. British Airways. Official website. Available at http://www.britishairways.com/travel/home/public/en_in [Accessed 24 Nov 2012]. De Wit, R. & Meyer, R. (2010), Strategy: Process, Content, Context, (4th Ed.), An International Perspective. CENGAGE Learning Business Press.  Grant, R. M. (2010) Contemporary Strategy Analysis, John Wiley & Sons; 7th Edition edition.   Greenair. (n. d.), ‘As rising jet fuel prices continue to impact, airlines are offered new software solutions to manage fuel reductions’. [Online] Available at http://www.greenaironline.com/news.php?viewStory=1194 [Accessed 24 Nov 2012]. Thomas, N & Ebrahimi, H. (2012), ‘British Airways owner IAG battles staff over plans to cut 4,500 jobs’. The Telegraph, 9 Nov. [Online] Available at http://www.telegraph.co.uk/finance/newsbysector/transport/9668483/British-Airways-owner-IAG-battles-staff-over-plans-to-cut-4500-jobs.html [Accessed 24 Nov 2012]. UK Aviation Forecasts. (2011), Department for Transport. [Online] Available at http://assets.dft.gov.uk/publications/uk-aviation-forecasts-2011/uk-aviation-forecasts.pdf [Accessed 24 Nov 2012]. UK parliament website. Available at www.parliament.uk [Accessed 24 Nov 2012]. Read More