The Business Level and the Functional Level Strategy Adopted by Etihad Airlines - Research Paper Example

EXECUTIVE SUMMARY Etihad Airways has been operating under strong competition and in the current business environment the business strategy should be regularly evaluated. Etihad has been able to have sustained competitive advantage because of its differentiation strategy and core competencies. It pursues utmost customer satisfaction as it differentiation strategy and is trying to establish a “privileged” and hard to replicate position in the industry. Its core competencies include direct and indirect support the economic growth of the nation, which also gives it political support. Continuous upgradation of its fleet is another area of its core competency. Strategic analysis using PESTEL and Five Forces analysis suggests that Etihad operates in an attractive industry but the buying power of consumers is high due to high level of competition in the industry. However, because of their core strengths, the airline would be able to achieve its goals and mission. There is ample opportunity for growth and expansion and based on its differentiation strategy, Etihad would continue to grow. Etihad has the location advantage also but customer service is not difficult to replicate and hence, Etihad needs to pursue differentiation through the economic support of the emirate. Table of Contents 1. Introduction 1 2. Porter’s Generic strategies - Differentiation strategy 1 3. Core competencies 3 4. PESTEL Analysis 4 5. Porter’s five forces analysis 7 6. SWOT Analysis 8 6. Current trend- conclusion and recommendations 11 References 13 1. Introduction Analysis of the business strategy helps ascertain the location of the organization within the industry environment. Strategy need not be based on rational planning or even conscious making decision assumptions (Mintzberg, 1987). Strategy can be formulated at three different levels – the corporate level, the business unit level and the functional or departmental level. This paper would analyse the business level and the functional level strategy adopted by Abu Dhabi based Etihad Airlines. Sustainable competitive advantage can be created and maintained either through market position or through core competencies (Leavy, 2003). The positioning approach can be evaluated through PESTEL analysis and the generic strategies which would reveal two dimensions of positioning – the industry attractiveness and the competitive strength. The strategic choice should be on how to leverage advantage amidst the competitive environment. The strategic choice should fit with the goals and objectives to gain competitive advantage (Allen & Helms, 2006). 2. Porter’s Generic strategies - Differentiation strategy Porter asserts that there are three basic strategies and firms perform best by adopting one of them – cost leadership, differentiation and focus (Allen & Helms, 2006). To become an industry leader, the company must be competitive. While Etihad externally seems to have established the business model of Emirates, they are actually pursing the differentiation strategy. They want to be “different and better” (Goold, n.d.) and hence they became the first airline to sport the new layout. They have also flown on different routes to demonstrate the coming standards. They do not want to venture into low-cost, all economy service like the Emirates. They want to maintain their product differentiation. However, firms have to differentiate based on their services, and not on the basis of products (Kandampuuly, 2002). Since flying from one destination to another is offered by all airlines, what would differentiate one airline from another would be the customer service. Services have evolved to become a strategic function. Differentiation is a key business strategy (Porter cited by Allen & Helms, 2006). When using this strategy companies focus on the unique product or service. If the product or service is unique, it provides high customer loyalty. Product differentiation entails fulfilling customer needs and this implies that the service has to be tailored to suit the customer needs. This also allows the organization to charge a premium price for their product or service. The differentiation strategy appeals to a niche market that is looking for exclusive product or service and are willing to pay a price for that. In devising a differentiated product (service) Etihad has taken into account its brand positioning, its image, the geographical reach, the market size, the delivery system and the marketing approach. The message of differentiation must reach the customers because customer perception of the company is important. To maintain the point of differentiation, Etihad is trying to establish a “privileged” and hard to replicate position in the industry (Leavy, 2003). Calling them “guests” instead of customers and unique branding adopted to differentiate between conventional classes of travel, are easy to replicate strategies. However, they have adopted customer focus as their point of differentiation. They are trying to ensure that even the economy class guests feel respected and receive the courtesy and comfort that other airlines have done away with. The cabin lighting system too matches the time and duration of the journey. Through exclusive cuisine from award-winning chefs, they have been able to enhance the eating experience of the guests on board. They have food and beverages managers for the premium passengers. Their premium seat sales are faster than the economy sales, as their customers are willing to pay premium for the services they get. Customer satisfaction is no more sufficient and customers look for satisfaction beyond their expectations. They seek fulfilment of their desires and they seek unique experiences. They want an engagement; they want customer delight (Mascarenhas, Kesavan & Bernacchi, 2004). Etihad is able to provide this unique experience to its “guests” 3. Core competencies Etihad’s sustainable competitive advantage appears to be a mix of a privileged market position and core competencies. They have detailed customer knowledge and focus thereby demonstrating that they understand, anticipate and are responsive to customer needs. Their customer-focused approach is their core competency. Their strategy is top-down and they look at their brand, product and service. Core competence must be rare, difficult to imitate, and it should be valuable to customers across a range of product-market opportunities (Leavy, 2003). A core competence should have technological dimension apart from governance and collective learning dimension. Because of this multi-dimensional character it becomes difficult to replicate the strengths of the organization. As far as the core competency is concerned, Etihad scores over its competitors. They have been able to directly and indirectly support the economic growth of the nation. Touching 45 destinations in just 4 years, they have been able to drive tourism, and attract investments to the UAE’s largest emirate. In addition, Etihad has a vital role to play in growing the export-oriented business from Abu Dhabi. Etihad Airways has made a significant contribution to Abu Dhabis gross domestic product (GDP) and also contributed to employment generation. Indirect economic contribution comes through suppliers, and vendors in various fields required by the airline such as advertising and marketing, IT and communications. The Oxford Economics Study has quantified the significant and growing contribution of the airline towards the economic growth of Abu Dhabi. As it expands its network, it contributes towards inward investment, and thereby the GDP. This is an innovative business model which enhances their competitive position in the sector. All of these are difficult to be replicated by competitors, and hence core competencies of the organization. Another core competency is that they are continuously trying to upgrade their fleet. They are constantly adding destinations and fleet to their network. They have the latest sophisticated aircrafts and freighters in the industry. They want to maintain their core competency and not diversify into low-cost carrier sector as Emirates has planned to do. Their long-term strategy is built on the assumption that markets in the principal catchment area will liberalize and open up. The catchment area comprises of the Gulf, the Middle East, the Indian ¬subcontinent and North Africa. They have planned their network for over 30 years. In fact their fleet order reflects the still regulated markets in India and Pakistan. Accordingly, they have set their targets for 5, 10 and 15 years for such markets. They have not yet entered Egypt, Canada and North Asia including Japan and Korea. Suppose these markets do not open up, they still have the flexibility to increase their frequencies. 4. PESTEL Analysis Situation analysis will be done through PEST analysis. Political – stability persists in Abu Dhabi and Etihad operates in a stable political environment. Economic – Oil, the natural resource of the region, drives the economy. Abu Dhabi, like other countries in the region has over reliance on oil and natural gas (Ladki & Misk, 2009). As a result there is no diversification in the manufacturing sector like other nations of the world. Etihad has been able to enhance the GDP and contribute towards the growth and development of the emirate. It has also induced inward foreign investment, apart from making the region attractive for tourism. Etihad contributes towards employment generation and indirect contribution comes in the form of suppliers and vendors required in large numbers. Currently Abu Dhabi reflects a sustainable economy. (Sorouh, 2010), which is conducive to the growth of the emirate. Social – As the economies are moving fast and young people wish to travel. As economies open up, there is business for all airlines and room for further expansion. In Abu Dhabi people live and thrive in a healthy and mutually beneficial proximity. The Gulf has been predicted to be the fastest growing region for international traffic. Between 2007 and 2010, the growth has been 6.9% passengers on an annual basis against the world average of 4.8 percent (Ladki & Misk, 2010). The Gulf region has a high mix of passengers with needs for both long and short haul flights. Technical – aircraft technology has advanced to such heights that Etihad can fly non-stop to any destination in the world. They integrate technology at each stage of their services. They have taken advantage of technology by investing in brand new aircrafts from Airbus and Boeing (McGinley, 2010). They have invested in the latest aircrafts and have also started their own training for pilots, thereby taking care of pilot shortages in years to come. They are also investing in e-commerce mobile technologies and customer relationship management which will lead to cost reduction and revenue growth (Jenner, 2010). Etihad has also partnered with Amadeus, the global leaders in technology for the travel and tourism industry, to implement inventory for the airline (Amadeus, 2007). This strengthens Etihad’s capacity to maximize revenue on every seat. Environmental – Etihad is supporting the venture for cleaner environment. It has partnered with Masdar, an initiative to establish the emirate as a centre for future energy innovation (Greenair, 2009). This is line with Abu Dhabi’s vision to become world leaders in clean technology and Etihad will be supporting the airline’s environmental initiatives, particularly concerning carbon and waste management. Legal – Etihad has low impact of legal environment especially in view of the court decision in their favor concerning the Force India case (Etihad Airways, 2010). Analysis This demonstrates that Etihad operates in a very stable political and economic environment. The company is financially sound and contributes significantly to the GDP and overall economic growth and development of Abu Dhabi. There is plenty of room for expansion and as more economies open up, business prospects only grow. The Gulf region has been forecast for growth and even now its growth is above the world average. Technologically, Etihad is in a very sound position. They continuously invest in upgradation, in the latest aircrafts. They also use technology to enhance the customer experience on-board. The environmental impact would be high in their favor as they support the carbon and waste management initiatives and the legal impact would be low as the court cases gas been decided in their favor. Thus, the political factor has low impact as it operates in a stable environment. They have stable consumers and the economic environment is conducive to growth. 5. Porter’s five forces analysis: the competitive environment can be determined by Porter’s Five Forces Analysis (Figure 1): Supplier’s power: the bargaining power of the suppliers is low as the airline has its own aircrafts. They do not have to lease aircrafts and moreover, because of their growth and expansion, they are able to bargain with other vendors, including airport fees. Buyer’s power: the bargaining power of the buyers or the passengers is high as Emirates and Qatar Airways operate in the same sectors and region. Hence Etihad would have to ensure customer satisfaction in services. Customer perception matters. Threat of new entrants: While several new airlines have started operations out of Abu Dhabi, these do not pose survival issues for Etihad because there is enough room for expansion. Etihad has its own class and Abu Dhabi is a major transit point for most travelers. Threat of substitutes: this has low impact because several airlines have started operations but none can match the service rendered by Etihad. Competitive rivalry: Etihad operates in a highly competitive environment with Emirates and Qatar Airways constantly trying to trump each other with fleet expansion. All these three airlines operating in the same region have adopted the same business model of establishing a government-owned operation to offer high-profile and high-quality scheduled services with the latest aircraft. However, amidst high fuel prices and slowing global economy, Etihad surges ahead when most airlines are struggling for survival. Their aircraft orders reflect a sound strategy for growth. Etihad has its own core areas of strength. Analysis Thus, most forces are weak but since the buyer power and competitive rivalry are high, it demonstrates industry attractiveness. At the same time, Etihad has to sustain competitive advantage through constant innovation in customer service and satisfaction. 6. SWOT Analysis Strengths – They have a strong global network covering 63 destinations in as many countries. They have a broad product line in both passenger service and freighter covering a wide network and most major markets. Nine new destinations have been added in 2009 and another nine in 2010. They pursue a customer-focused approach They have been recognized as contributing to the economy of the emirate. The location of Abu Dhabi, being at the crossroad of the world, is the greatest strength of Etihad and promises a prosperous future. They can fly with new technology to different parts of the world. Moreover, Abu Dhabi is becoming the destination of choice. People will want to go to Abu Dhabi and Etihad’s strategy is based on this premise. Abu Dhabi has planned to invest $200 million in infrastructure and this is going to be very attractive for shopping and tourism for countries such as India. Etihad has been able to attract the right talent from all over the world. The majority of the staff are expatriates and they plan to blend the Emirati executives with the expatriate team to have a world class global aviation environment. To meet their fleet expansion plans and to ensure that they do not encounter fleet shortage, they have set up their own in-house cadet pilot training ¬programme. They lead by example and they live corporate values (Turner, 2010). They match people to roles and develop. Weakness Strong competition from Emirates and Qatar in the same geographic region. Uncertainty of demand Sensitive to world events Cyclical demand Opportunities Growing youth force keen to travel, New aircrafts that would enhance market share Increased demand in certain sectors. New untapped sectors such as Egypt, Canada and North Asia including Japan and Korea. Cargo business growth due to Dubai’s economic boom Threats Slow down in the airline industry affected due to global economic downturn. Threat from new entrants as no barriers to entry. Strong competitors in Emirates and Qatar Airways. Strong union against the three Gulf carriers. The European Union of Airlines has been claiming that Etihad Airways has been given too many free kicks and should be reined in (McGinley, 2010). Thus expansion into other sectors will not be smooth. Canada has already refused further landing rights (Centreforaviation, 2010). Thus, the SWOT analysis suggests that Etihad has core strengths that will help it realize its achievable goals and mission. They have taken the right decisions to form the foundation. Because of its strategy to contribute to the growth and the development of the economy of Abu Dhabi, Etihad finds a very favorable political environment. Investments in airport infrastructure and a passenger terminal dedicated exclusively to Etihad, ensures that growth in the number of passengers would not affect service. Opportunities for growth are evident and it has also been charted out by the management at Etihad. Plans over 30 years have been incorporated while ordering for aircrafts. The greatest opportunity comes from its location, from a growing workforce, untapped sectors in passenger travel and growing cargo business in Dubai. Threats would always persist in any sector but Etihad has the financial and management support to withstand the threats. Thereat from competitors has been the reason that Etihad Airways has implemented the differentiation strategy. Its aggressive growth plans would ensure that threats can be turned to opportunities. However, there are allegations that Etihad has preferential treatment over fuel bills (McGinley, 2010). 6. Current trend- conclusion and recommendations To become industry leaders companies must be successful both nationally and aboard and this is applicable to all sectors in most countries (Allen & Helms, 2006). Etihad’s growth has been built on hard to replicate factors or core competencies. The advantage of the geographical location, their management style, their ambitious personalized service, demonstrates that Etihad is well-positioned. The current trend is to offer customer satisfaction over expectations and Etihad is geared towards that. The business strategy of Etihad Airways is to focus on the customers, first, customer second and customers all the way. The strategic analysis reveals that Etihad is well positioned in the industry that is attractive and the airline has competitive strength. Customer focus has become their area of core competency and they are leveraging benefit through this business model. Etihad Airways had been running in loss but due to its customer-focused approach, they have also been able to breakeven in the last financial year. They have aligned their core strategy in line with their principle and through analytical insight they have been able to forecast and plan. Based on the three generic strategies identified by Porter, Etihad Airways pursues the differentiation strategy, which manifests in excellent customer service. Core competencies should be rare to replicate and Etihad has focused on the growth and development of Abu Dhabi, which also provides them with political support, necessary for growth. The SWOT analysis suggests that Etihad has to be cautious and should be prepared for lack of support from the European Union of Airlines. Even Canada has refused additional landing rights and all three Gulf Carriers have been affected. While Etihad has core strengths, the threats cannot be overlooked. They may quickly need to change their plans and diversify to sectors such as Korea and Japan, ahead of their schedule. Regional competitors are also posing threats as both Emirates and Qatar are performing well. Customer service is excellent at Etihad but it is not difficult to replicate. They need to develop new competencies to fight the regional carriers. Since Etihad is not keen on low-cost fares, they could think in terms of short-haul sectors so far not touched by Emirates or Qatar Airways. Opportunities exist for growth and expansion but an innovative business model, that is difficult to replicate, and flexible enough to change, should be pursued. References: Allen, R.S., and Helms, M.M. (2006). Linking strategic practices and organizational performance to Porters generic strategies. Business Process Management Journal. 12 (4), 433-454 Amadeus. (2007). Etihad Airways modernises approach to inventory management following successful implementation of Amadeus Altéa Inventory, retrieved 29 October 2010 from http://www.amadeus.com/au/x46401.html Centreforaviation. (2010). Europes flag carriers attack Emirates expansion, Canada blocks UAE airlines and dispute escalates, retrieved 29 October 2010 from http://www.centreforaviation.com/news/2010/10/16/europes-flag-carriers-attack-emirates-expansion-canada-blocks-uae-airlines-and-dispute-escalates/page1 Etihad Airways, 2010, Etihad successful in UK Court of Appeal decision, retrieved 31 October 2010 from http://www.etihadairways.com/sites/Etihad/ae/en/aboutetihad/mediacenter/newslisting/newsdetails/Pages/Etihad-successful-in-UK-Court-of-Appeal-decision-Oct10.aspx?fromNewsListing=true Greenair, 2009, Etihad Airways partners with Abu Dhabis Masdar to develop carbon and waste reduction initiatives, retrieved 31 October 2010 from http://www.greenaironline.com/news.php?viewStory=423 Jenner, G. (2010). IT spend trends: The IT investment picture, retrieved 29 October 2010 from http://www.flightglobal.com/articles/2010/06/25/343573/it-spend-trends-the-it-investment-picture.html Ladki, S.M., & Misk, A.P. (2009). Airlines competition in the gulf: a competitive advantage, BNet, retrieved 29 October 2010 from http://findarticles.com/p/articles/mi_6766/is_1_9/ai_n36509500/?tag=content;col1 Leavy, B. (2003). Assessing your strategic alternatives from both a market position and core competence perspective, Strategy & Leadership, 31 (6), 29-35 Mascarenhas, O.A., Kesavan, R., & Bernacchi, M. (2004). Customer value-chain involvement for co-creating customer delight. Journal of Consumer Marketing, 21 (7), 486-496 McGinley, S. (October 14, 2010). Criticism of Gulf carriers concerning – Etihad CEO, retrieved 29 October 2010 from http://www.arabianbusiness.com/criticism-of-gulf-carriers-concerning-etihad-ceo-356657.html Mintzberg, H. (1987). The Strategy Concept I: Five Ps for Strategy. California Management Review. Sorouh. (2010). Abu Dhabi Plan 2030, retrieved 29 October 2010 from http://www.sorouh.com/en/article/abu-dhabi/abu-dhabi-plan-2030.html Turner, J. (2010). Developing a Corporate HR Strategy, retrieved 29 October 2010 from http://www.business.otago.ac.nz/com/study/Visiting%20Executive%20Programme/Seminar_Slides/VEP%20-%20Jill%20Turner%20-%20HR%20Strategy%20Presentation%2023%20Aug%2010.ppt Read More