Strategic Alliances in the Airline Industry - Literature review Example

Supervisor Strategic Alliances in the Airline Industry: An analysis of the effects on Human Resource Management(HRM) and the benefits of allying. Research Proposal. By: November, 2008 TABLE OF CONTENTS 1.1 Introduction 1.1.1 Background Problem Statement and Research Questions 1.1.2 Research Purpose and Objectives 1.1.3 Importance and Rational of Study 1.1.4 Work structure 2.0 Summary of Literature 3.0 Research Methods 4.0 Timetable and Resources 1.1 Introduction The coming together of companies to gain synergistic effects has been seen in recent times as the most profitable way of investment. We often hear of this or that company merging with another or taking over another. It is common knowledge as it prominent portion of broadcasted news and columns in business papers have of late been dedicated to mergers and acquisitions as they are the most important forms of investment today (Randeniya and Roivas, 2004). Mergers and acquisitions (M&As) have been the growing trend within the last few decades. The increasing number of M&As within the last few years can be associated in part by rapidly changing technologies, with particular advances in computing and communications, the quest of market dominance, as a strategy of entering into new markets and in all to wipe out competition (Cummins & Xie 2007, Cummins et al., 1999, Cummins and Xie, 2005). Most researchers have argued that (e.g. Cummins & Xie 2007) firms with relatively high returns on equity, capital and larger market shares are more likely to be acquirers, while those with low return on equity and financially vulnerable firms are more likely to be targets. 1.1.1 Background Problem Statement and Research Questions In finance, it is a common practice to view mergers and acquisitions as manifestations of the market for corporate control. Much of foreign direct investments usually take the form of mergers and acquisition and according to Reis & Head (2005), two-third of FDI that took place between the periods of 1987-2001 was in the form of mergers and acquisition. With their relative advantage of capital, technology, and managerial resources that would otherwise not be available to the host country or other domestic firms, FDIs are often seen as monopoly because of their economic, technology and managerial advantage they posses. Subsequently, host countries enjoy these benefits and costs that otherwise is unavailable to domestic firm. Against this background, this paper seeks to provide an answer to the following research questions What has been the nature of strategic alliances at the airline industry How strategic Allainces in the airline industry does affect Human resource Management issues What are the potential benefits and costs associated with strategic alliances in the airline industry Are strategic alliances in the airline industry worth the trouble 1.1.2 Research Purpose and Objectives This paper is aimed at reviewing strategic alliances in the airline industry, the reasons or motives behind their pursuance and the human resource management issues that firms may face. It starts by reviewing strategic alliances and then proceeds to drawing a line between them. Other objectives will include To analyse and evaluate potential costs and benefits associated with strategic alliances at the airline industry. To find out and states the various ways through which strategic alliances at the airlines industry affect human resource management issues. The research will also seek to understand if strategic alliances at the airlines industry are worth the trouble. 1.1.3 Importance and Rational of Study Going through previous research within the area I realised, resources mastery and understanding of research subject area are necessary for writing a good research paper. I also came to realise through examination of what others have written on merger and acquisition, little or nothing has been said on the impact of mergers on human resource management. To beef up existing knowledge I decided to examine strategic alliances at the level of the airlines industry. Focusing in the sector provides a number of advantages. Firstly the research provides an important opportunity agency costs within this area. In addition, existing research in this area is scanty as the findings will proof quite useful subsequently. 1.1.4 Work Structure In the work proper, chapter one will focus on the problem statement motivation of work and objectives of study. Chapter two will provide the theoretical framework through a review of available literature. Chapter three will look at the research methods and design. Chapter four then will present data collected in the form of an interview and questionnaires while chapter five will analyse the information, provides findings, conclusion and recommendations. 2.0 Summary of Literature Developments within the last two decades such as globalisation, information technology deregulation and above all the European integration have not only affected European politics but transformed the European banking industry as well (Goddard et al., 2001,Tavakoli et al., 2007). According to Tavokoli et al., (2007) deregulation of banks, the information technological age and merger and acquisitions have transformed the strategic options of both small and large banks. Berger (2003:4) contends that "M&As are dynamic events that often involve changes in organizational focus or managerial behavior that change the X-efficiency of the organisations--moving them toward or away from the optimal point on the best-practice efficient frontier". There always is an inherent diviation of the expected outcome of a merger or acquisition and the actual experience of the key stake holders such as customers, employees, share holders and suppliers. (Buono, 2003). There are a lot of forces, some positive, some negative that act on mergers to influence their outcomes, which need to be meticulously handled. Positive forces include managerial vision, transitional expansion, financial analysis, duplication elimination etc while negative forces include synergy trap, market sanctions, cultural clash/employee resistance, integration costs etc. (Randeniya and Roivas, 2004). The positive factors go a long way to give the firm added value that is geared towards achieving the aims of the acquisition. The negative factors, especially cultural clash/employee resistance can very negatively affect the firm and slow down, if not, make the intentions of the merger or acquisition fail completely. Careful address and handling of these issues is thus the preoccupation of management to make the best out of whatever situation. Most managers handle this by first taking on cultural integration before bring in structural integration of the firms. (Gustafsson and Hukkanen, 2002). In this way, the two companies start by adapting the culture of each other and learning how to work together before structural changes are effected. According to the World Trade Organisation (WTO), the flow of FDI has substantially changed the international economic landscape. From1980 it has been argued by a handful of researchers (e.g. Hill 2007, Sumelong et al 2003, Buckley 2004, and Reis & Head 2005) that FDI outflow has overtaken the growth of world exports. The expansion in FDI became relatively pronounced during the period 1985-2000, a period characterized with scores of mergers and acquisitions, the Asian financial crises, the oil boom and privatization programs in Latin America (Hill 2007, Sumelong et al., 2003). In the year 2000, FDI outflow stood at $1.4 trillion (Hill 2007, Sumelong et al., 2003). Figure 1 below gives a summary of FDI and export growth between 1980-2000. Sources: Exports: IMF 2003; FDI Outflows: UNCTAD 2002 2.1.1 Effects of strategic alliance Berger (2003) went further to argue that while there have been substantial consolidation within the European market in recent years, M&As activities have only been significant between institutions within individual European nation. Smaller banks are likely to offer more customers oriented personal services, and with mergers and acquisitions, cross-border operations, these services faced complexities and become standardized through utilisation of hard information (Tavokoli et al., 2007). Today, it has increasingly been argued that strategic alliances are occurring at different pace within different continents (Berger et al., 1999). According to Berger et al., (1999) it has been occurring at a torrid pace in the United States while in Asia many researchers see it as a part solution to the financial distress and in Europe it is occurring at a rapid pace. Strategic alliances do not only increase competition and efficiency in the airline sector but ensures financial resources are allocated and directed at the most efficient use (Goddard et al 2005, Kaufman & Eisenbeis 2006).Through merger and acquisition, new products are developed, consumers become exposed to a variety of financial services as both risk exposures and systematic risk are reduced (Berger et al., 1999, Goddard et al 2005). A handful of researchers (e.g. Akhavein et al 2003, Berger 1998) found that M&As improved profit X-efficiency, and that this improvement was due to an increased diversification of risks and an improved risk-expected return tradeoff. Strategic alliances will increase competitive pressure and airlines will reduce prices and cost through an elimination of areas of low productivities through scale economies, gains from sharing physical assets and knowledge with foreign subsidiary. In all, through this companies move from one-dimensional to multidimensional capabilities Goddard et al 2005, Kaufman & Eisenbeis 2006). Kaufman & Esenbeis (2005:10) identify another problem associated with strategic alliances. These researchers argue that as home institution increase their foreign subsidiaries in the host country "host country regulators face a loss of constituents to supervise and regulate". This is so because by the present EU charter home country regulators are responsible for supervision and regulation of institution regardless of the location of branches (Goddard et al., 2001, Kaufman & Eisenbeis 2005). The problem is further complicated with nationalistic concerns which may lead to a home country bias (Goddard et al., 2005, Mintsberg et al., 2002). Discussing on this issue, Ingves (2007) argue that increase in strategic alliance will result to over interdependence between different countries in such a way that financial problems in one country will be spill over to the other countries. Decisions by one country to regulate the financial system will certainly affect all the other countries. To conclude, the general mode of acculturation and degree of strategic alliances takes its roots from the underlying motive behind the merger. Some firms will take the mergers' objective and on company features such as size ratio as their base for integration. (Risberg, 2006). Nevertheless, no matter the motive, it is always advisable to pay attention to organisational culture and management turn over by swapping a good number of managers between the parent firm and the acquired unit during an integration process. (Risberg, 2006). 3.0 Research Methods According to Saunders et al (2000) both quantitative and qualitative data analyses can be used in analysing data to arrive at reasonable conclusions. This study will therefore employ both quantitative and qualitative methods to accomplish its objectives. Under quantitative analysis, the study will analyse how stock returns strategic alliance airline companies moved three years into the alliance. The hypothesis that will be tested here is that the firms exhibited significant negative abnormal returns following the announcement of a strategic alliance. The abnormal returns that usually result from an event can be computed as follows: (1) Reality can be perceived from different angle depending on the researcher and individual in question. This view should follow the scientific and theoretical choices of the study. Performing a research requires the researcher to probe into different ideals (Bryman & Bell 2004). In this study, I have identified with positivistic research approach where I intend to use questionnaires and interview to gather my information thus identifying me with two approaches. Bryman & Bell (2004) contend that researchers can identify within two approaches. Depending on the researchers in question, they can identify and position themselves anywhere along the two approaches. As a positivism researcher I am concern with the reproduction of the reality in a much more objective way. I am therefore mostly concern with real life situation. That is what is actually happening. 3.1 Data Sources Stock price data and market return data relating to the companies will be retrieved from the Thomson Financial DataStream data base. This data base contains information about all major stock price information, market return data, dividend yield, annual reports and other relevant financial information on all listed companies in all stock exchanges in the globe. It therefore remains an essential source of data for this study. Data will also be drawn from journals, newspapers and reliable online sources. 3.2 Questionnaires The questionnaires will be designed in line to the theoretical framework and targeted to frontline workers and management of previous airline companies that benefited from strategic alliances. These questionnaires will be closed ended and will be distributed to about 100participants via surveymonkey.com. Primary data collected via the questionnaire will be transferred onto SPSS and quantitatively analyzed. Data collected via the interviews will be qualitatively analyzed. 4.0 Time Plan and Resources Activity Week one Week two Week Three Week Four Milestone Acceptance of research topic.Problem Formulation and objectives X Done and accepted Research proposal comment effected and accepted by supervisor X Supervisor approved. Chapter 1 submitted for comment. X Supervisors comment Chapter 2, started, literature to be reviewed agreed upon with supervisor X Agreed with Supervisor Chapter one corrected and approved X Chapter one completed Questionnaires designed and distributed X Dispatching questionnaires Chapter 2 submitted XX completed Chapter three completed XXX completed Data extracted from data base,financial times Data analysis Questionannaire analysis XX completed Chapeter five completed. XXXXX Defense date agreed upon First draft xx submitted Preliminary pages effected Final project submitted Defense date agreed upon Few corrections Project approved References Akhavein, J., Berger, N., & Humphrey, B., (1997). The effect of banks Mega mergers on efficiency and prices: Evidence from the profit function. Review of Industrial Organisation 12, pp. 95-139 Berger N., (1998). The efficiency effects of bank mergers and acquisition: A preliminary look at 1990s data. Bank Mergers and Acquisitions, Kluwer Academic, Boston, MA, pp. 79-111 Berger N. A., (2003). The efficiency effects of single market for financial services in Europe. European Journal of Operational Research. Vol. 150, Issue3, Pp. 466-481 Bryman, A. and Bell. E: (2004) Business research methods. Oxford University press, 2003 Burton, D. (2000): Research Training for Social Scientists, a handbook for postgraduate researchers, edited by Dawn Burton. Sage Publications Ltd, Great Britain. Cummins et al., (1999) Consolidation and efficiency in the US life insurance industry, Journal of Banking and Finance 23 (1999), pp. 325-357. Cummins D.and Xie X., (2005) The united states insurance market: Characteristics and trends,. Efficiency and scale economies in the US property-liability insurance industry. Working paper, University of Pennsylvania, Philadelphia. Goddard, J., Wilson, J., & Lipczynski, J. (2005).Industrial Organisation. Competition, Strategy, Pearson Education. Goddard, J., Wilson, J., & Molyneux, P., (2001). "European Banking efficiency, technology and growth". Publisher: John Wiley. Gustafsson, S., Hukkanen, M. (2002) Managing the Integration Process in a Merger. Case: Cloetta Fazer. Linkping University, Department of Management and Economics. Hill, W. L. C., (2007). International Business. Competing in the Global Market place 6th EDT McGraw-Hill International Edition Kaufman, G. G., & Esenbeis, A. R.,(2006). Cross-Border Banking: Challenges for deposit Insurance and Financial stability in the European Union. Working Paper 2006-15 Randeniya, R.., Roivas, J. (2004) INTERNATIONALISATION THROUGH MERGER: The Strategy of TietoEnator. Linkping University Risberg, A. (2006). Mergers and Acquisitions. A critical Overview. Routledge. London and New York. Reis, J., & Head, K., (2005). FDI as an outcome of the market for corporate control: Theory and Evidence. Journal of International Economics. Vol. 74, Issue1, Pp. 2-20 Saunders M., Lewis P., Thornhill A. (2000). Research Methods for Business Students. Second Edition. Financial Times, Prentice Hall. Read More