Review of the Strategic Situation of Air Asia X - Essay Example

You are to produce a review of the strategic situation of Air Asia X, based on the provided case study “AirAsia X: Can the low cost model go long haul?”. In your review you should use theory from the module to: a) Examine AirAsia X’s business environment; b) Analyse AirAsiaX’s current strategy; c) Appraise the strategy – how well does it fit the environment, and how likely is it that the company can sustain competitive advantage? Be careful that your assignment relates to AirAsia X and not AirAsia, its sister company. Executive Summary The achievement of organizational goals is usually considered as a key priority for each organization’s strategic planners. In practice, it has been proved that while developing their plans, organizations are likely to meet a series of challenges. Moreover, it seems that such problem appears in all organizations, no matter their readiness to face market pressures or the effectiveness of their policies. Air Asia X, a major firm of the airline services industry of Malaysia, is a firm already well established in the Asian market. The firm’s success has been considered as resulted from the support provided by its sister company, Air Asia, a claim that cannot be doubted. Still, the organization has proved that it is able to perform high even if operating independently from Air Asia, a target that has been achieved. In the future the firm needs to further promote its existing strategies and to seek for innovative policies that will secure the leading position of the organization in its industry. Table of Contents Executive Summary 2 1. Introduction 4 2. Strategic situation of Air Asia X 4 2.1 Analysis of the organisation’s business environment and of industry survival and success 4 2.2 Analysis of the organisation’s strategy 5 2.2.1 Porter Five Forces 5 2.2.2 Value chain theory 6 2.2.3 Resource based theory 7 2.3 Critical appraisal of the strategy 8 3. Conclusion 10 References 11 Appendices 13 1. Introduction The evaluation of organizational needs is a key part of the strategic planning process. At the same time, the availability of resources for realizing organizational plans can highly affect the structure of each organization’s strategies. The above two factors, the needs and the resources, are the two key criteria on which critical strategic decisions of organizational leaders should be based. Darren Wright, the Head of Commercial Operations of Air Asia X, would use the above factors for deciding in regard to a series of critical strategic issues related to the particular organization. At the same time, certain other factors, such as the organization’s environment would be able to influence the success of the above firm’s plans. Air Asia X has established a practice, which has been uncommon for its industry: the low cost fares for long haul travel. This practice is related to certain risks, as analysed below. On the other hand, the support provided to the firm by its sister-firm, Air Asia, has helped towards their limitation of these risks but not to their elimination. The evaluation of the firm’s existing strategies, as influenced by its environment, would help the firm’s leader to decide whether these strategies should continue as in their current form or whether they should be revised, either fully or partially. 2. Strategic situation of Air Asia X 2.1 Analysis of the organisation’s business environment and of industry survival and success The airline industry in Malaysia is highly developed. The state has emphasized on the industry’s infrastructure so that the services provided in the industry are kept at high quality. However, the airline industry in Malaysia is a close industry; there are only two competitors: ‘AirAsia X and the Malaysian Airline System (MAS)’ (Azhar and Francis 2012). Since 2011, efforts have started for ‘a share swap’ (Borneo Post 2011) between the two firms. Through this swap, t’he Chief Executive of Air Asia Group would acquire the 20% of the shares of MAS’ (Borneo Post 2011). Up today, the terms of this agreement have not been verified by both parties. In the beginning of 2012, the Maybank Investment Bank, in Malaysia, warned that the country’s airline industry should expect to face strong turbulences due to the recession developed in West (Borneo Post 2012). Moreover, since 2011, a decline in the industry’s profits has appeared (Bursa Malaysia Market News 2011), a trend that leads to concerns for the industry’s prospects in the future. Towards the same direction, in June 2012 IATA stated that the profits of the global airline industry for 2012 would be expected to be significantly reduced due to the increase of price of oil and the debt crisis in European Union (FMT News 2012). 2.2 Analysis of the organisation’s strategy 2.2.1 Porter Five Forces One of the most known frameworks for the analysis of a firm’s strategic decisions is the Five Forces model of Porter (Graph 1, Appendices). The above model is based on the following rule: in the context of modern market each organization has to face five forces (Hill and Jones 2009). The ability of an organization to minimize the effects of these forces defines the organization’s competitiveness (Hill and Jones 2009). The five forces included in the Five Forces model are the following: ‘a) entry of new competitors, b) increase of competition among existing rivalries, c) bargaining power of customers, d) bargaining power of suppliers and e) appearance of substitute products’ (Hill and Jones 2009, p.42, Graph 1, Appendices). The specific model has the following advantage: it can be used for evaluating the competitiveness of all firms operating in a particular industry, and not just of one firm (Henry 2008, p.69), at the level that all industry’s firms will have to face these forces, even if their respond to the above forces will not be the same (Henry 2008, p.69). However, the model of Porter can be used for comparing firms operating in the same market; if not, then the forces that the firms have to face will be differentiated (Phadtare 2011, p.79). Using the Porter’s Five Forces model, the business environment of AirAsia X could be analyzed as follows: a) new competitors; the Malaysian market can be characterized as a rather close-market; a similar assumption can be developed in regard to the airline industry which is dominated by two firms: AirAsia X and Malaysian Airlines System (Azhar and Francis 2012); in September 2012 a new firm, Malindo Airways, entered the particular industry. The firm focuses on low-cost faire, as AirAsiaX. In this context, the treat of new entrants would not be considered as a pressure against AirAsiaX; b) in regard to its existing competitor, MAS, AirAsia X would not have to face an increase of competition; the position of the two firms in the Malaysian airline industry is standardized and no changes are expected to the firm’s existing market share (Azhar and Francis 2012), c) bargaining power of customers in the Malaysian airline industry is rather low, since there are just two firms operating in the sector; d) the bargaining power of suppliers in the particular industry can be characterized as of average level; as noted in the case study, AirAsia X uses Airbus and not Boeing; the firm is necessarily depended on a particular supplier in terms of vessels but it can easily change suppliers in regard to other parts of its services, such as food, IT support and so on and e) it would be rather difficult for substitute products to appear since the firm is based on the low-cost fare for long haul travel; because the financial risks involved are high, no other carriers have entered this field; other low cost carriers, such as the ‘Cebu Pacific and Indonesia’ Lion Air, Philippines’ (p.20 of case study). 2.2.2 Value chain theory A different approach for evaluating a firm’s strategic position is the Value Chain theory (Graph 2, Appendices). The specific theory is based on the idea that ‘a company is a chain of activities which transform inputs into outputs that customers value’ (Hill and Jones 2012, p.90). According to the above, inputs and outputs are concepts incorporating in the value chain theory. The next issue addressed by this theory is the transformation of inputs to outputs: this transformation takes place through activities that are divided into ‘primary and support activities’ (Khosrow-Pour 2002, p.722). The primary activities are related to the ‘product’s creation and promotion to the market’ (Khosrow-Pour 2002, p.722) while the support activities are those that provide the means so that the primary activities can be developed (Khosrow-Pour 2002, p.722); IT used in the production process is the most common example of support activity (Khosrow-Pour 2002, p.722). The value chain theory is quite important since it offers a basis for examining a firm’s internal processes and for evaluating their impact on organizational performance (Cushman and Kovacic 1995, p.183). Also, the above theory can be used for understanding the current level of a firm’s competitiveness, as compared to that of its rivals (Goodman 1994, p.142). At the same time, the value chain theory helps to realize that when evaluating an organization’s performance two different issues need to be examined: a) are the internal functions of the organization effective? and b) are the functions appropriately aligned so that the overall performance of the organization is enhanced? (Cushman and King 1997, p.16). Using the value chain theory, the strategic position of Air Asia X would be analyzed as shown in Table 1 below. Table 1 is divided into two parts, showing the primary and support activities in Air Asia X. Table 1 – Value Chain in Air Asia X Organizational culture (team work, emphasis on collaboration and equality) Organizational structure (CEO controls all plans/ a central department in Kuala Lumpur, up to 2010 AirAsia X was part of Air Asia, currently Air Asia X operates independently) Control systems Emphasis on training/ use of staff of AirAsia/ Excellent customer support Continuous training Research & Development (Design of services in detail, establishment of strategic alternatives, search for competitive advantage/ low cost long haul travel, improvement of relationship with the Malaysian government, seek for strategic alliances) Production (Excellence of customer services) Sales outlets Traditional advertising methods Social Media Online sales Sales of tickets through agents A 24hrs call center Excellent on-board service Online support to customers 2.2.3 Resource based theory The resource based theory focuses each firm’s resources as critical factors in regard to the firm’s performance. According to the above theory, the resources of each organization can highly support the organization’s competitiveness only if ‘they are unique and difficult to be imitated’ (Khosrowpour 2006, p.645). In other words, in the context of the above theory, a firm can obtain a competitive advantage towards its rivals only if ‘it can retrieve resources that are unique, compared to the resources used by the competitors’ (Armstrong and Baron 2002, p.31). It should be noted that the resource based theory refers primarily to the organization’s human resources, as they can result to the creation for the organization of ‘a human resource advantage’ (Baron and Armstrong 2007, p.100).At this point, reference should be made to an important limitation of the resource based theory: the specific theory does not take into consideration ‘the decrease of value of resources through the years’ (Henry 2008, p.144, Stahl and Bjorkman 2006, p.21). Even if the value of resources that an organization has retrieved is high, it is possible that after a while this value will be decreased at such level that the organization’s competitive advantage towards its rivals will be eliminated. Another potential limitation of the specific theory could be the following one: the resource based theory is based on the assumption that the differences between organizations in regard to their human resources can last for a long period of time, a fact that it is difficult to be verified in practice (Barrar and Gervais 2006, p.19). In the case of Air Asia X, the use of the resource based theory would lead to the following assumptions: a) the performance of the firm’s staff is excellent; in fact as noted in the case study the level of customer services is at the highest possible level creating a unique advantage for the organization; b) the emphasis on training helps staff to keep its competiveness compared to the staff of rivals; c) the fact that the staff of the sister’s firm, Air Asia, has been used for supporting the operations of Air Asia X is considered rather as an advantage and not as a weakness of the organization. 2.3 Critical appraisal of the strategy The strategy of AirAsia X could be evaluated using an appropriate appraisal tool. The VRIN framework, as developed in the literature, is such tool. The VRIN framework has been developed in the context of the Resource-based theory, as presented above. According to the VRIN framework, an organization can secure its competitiveness only if it manages to retrieve resources that can be characterized as ‘valuable, rare, imperfectly imitable and non substitutable’ (Boyes 2011, p.116). The terms included in the VRIN framework could be analyzed as follows: a) a resource is valuable when it can help towards the identification of a strategy that will enhance organizational value (Boyes 2011, p.117), b) a resource is rare when it is not easy to be retrieved (Boyes 2011, p.117), c) a resource is ‘inimitable only when it can be used by just one organization’ (Boyes 2011, p.117) and d) a non-substitutable resource is that resource that cannot be replaced by substitutes (Boyes 2011, p.117). Instead of using the VRIN Framework, it is possible to employ the VRIO Framework which is based on the same components with the following difference: in the VRIO Framework, the letter ‘N’ is replace by the letter ‘O’, which reflects the word organization (Boyes 2011, p.117). Peng (2008) highlights the importance of the VRIO Framework for identifying those organizational resources and capabilities that can be considered as a competitive advantage (Peng 2008, p.72). The resources and capabilities of AirAsia X would be appraised using the VRIN and VRIO framework, as presented above. The Table 2 presented below shows the firm’s resources/ capabilities as evaluated through the above two frameworks. The VRIN framework is used as the basis, while from the VRIO framework only the last element, the ‘Organization’ is presented, since all other elements are common to the VRIN framework. Table 2 VRIN/ VRIO FRAMEWORKS Type of capability/ resource Performance of the organization / level Valuable Rare Inimitable Non-substitutable Organizational Yes Yes NO NO Yes low cost pricing High level Yes Yes Yes Yes Yes Flat-bed seats High level Yes NO NO NO Yes Customer support Excellent Yes NO NO NO Yes Food/drink separated from ticket High level Yes NO NO NO Yes Sales outlets Excellent Yes NO NO NO Yes Social media Excellent Yes NO NO Yes Pre-paid baggage Average level NO NO NO NO Yes Flight transfers Below average Yes NO Yes Yes Yes Political relationships Below average 3. Conclusion In terms of their structure, the strategic plans of Air Asia X can be characterized as of high quality. In practice also, the performance of these plans has been high, as proved by the firm’s current position in the global airline industry. As noted in the case study, the firm has been the first one to take the risk of offering to the public long haul travels at low cost faire. Up today, the firm has managed to keep the specific risk controlled. On the other hand, the firm’s CEO seems to be highly capable of confronting strong market challenges. Indeed, the detailed strategic plan that the firm’s CEO has established has a key role in the firm’s success: in the context of this plan, each business sector is supported using policies that are appropriately aligned with this sector’s characteristics and needs. The only one issue which has not been effectively addressed up to now is the following one: how the firm would manage to continue its low-cost policy if its profits are declined? More specifically, in the future, the increase of competition in the specific field would lead to the decrease of the firm’s profits, a problem that would be difficult to be managed even if the firm is able to keep its operating costs low. Another issue that the firm’s CEO would have to consider is the improvement of the firm’s relationship with the Malaysian government; the deterioration of the above relationship would possibly threaten the firm’s efforts to secure its market position. References Armstrong, M. and Baron, A., 2002. Strategic HRM: The Key to Improved Business Performance. London: CIPD Publishing. Azhar, K. and Francis, I., 2012 “Aviation landscape set to change” The Edge. 12 September 2012. Web. 4 December 2012. Available at http://www.theedgemalaysia.com/highlights/220303-aviation-landscape-set-to-change.html [Accessed at 4 December 2012] Baron, A. and Armstrong, M., 2007. Human Capital Management: Achieving Added Value Through People. London: Kogan Page Publishers. Barrar, P., Gervais, R., 2006. Global Outsourcing Strategies: An International Reference on Effective Outsourcing Relationships. 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Appendices Graph 1 – Porter’s Five Forces on industry competition (Source/ website: http://www2.ifm.eng.cam.ac.uk/dstools/paradigm/5force.html) Graph 2 – Value chain theory (Source: Porter 1985, p.37) Read More