Critical Strategic Analysis of British Airways - Coursework Example

Critical strategic analysis: British Airways BY YOU YOUR SCHOOL INFO HERE HERE TABLE OF CONTENTS Introduction 2. British Airway’s strategic position 3. Resource audit 4. Value systems analysis 5. BCG Matrix analysis 6. Directions for future strategic growth and recommendations 7. Conclusion Critical strategic analysis: British Airways 1. Introduction British Airways (BA) operates within a dynamic and highly competitive market environment (British Airways 2009). The company competes with Virgin Atlantic, Qantas, Air France-KLM and Cathay Pacific, whilst also facing stiff competition from budget and no-frills airlines such as RyanAir and EasyJet. Whilst BA currently sustains over 150 destinations, both short- and long-haul, the company continues to lose market share against other airlines. BA currently boasts 47 percent market share, however with new price competition, BA has a difficult time monopolising the European aviation industry (Jarvis 2014). This report analyses British Airways’ competitive position and, through audit of the firm’s resources and value systems, determines how the company might achieve growth effectively in what is a rather mature and low-growth market. The report primarily analyses the operations function of the business to best analyse its most potent competitive advantages and opportunities for strategic growth. 2. British Airways’ strategic position British Airways now pursues a cost leadership position against major competition. The airline industry in Europe is characterised by many price-sensitive consumers that select low-frills airlines as a means of satisfying their own budgetary needs. The ability of BA to control costs allows the airline to keep ticket prices lower for these price-sensitive buyers in an environment where price wars continue to improve market share for smaller competition (Payne, McDonald and Frow 2011). Predominantly, BA had maintained a reputation for being a high-priced airline company, however the firm better controls its operating costs in order to provide lower fares in an effort to compete with these growing and influential budget carriers (Smith 2013). Where BA maintains its cost leadership advantages is in operation cost controls. This cost leadership strategy is maintaining a lower price to value ratio, or satisfying customers by offering prices that are satisfactory for the value they receive (Thompson, et al. 2010; Murray 1988). Primarily, cost leadership as a new competitive strategy is achieved through economies of scale, cost-related advantages that are realised through size, scope of the firm and through scale of service production (Truett and Truett 2007). British Airways maintains the capacity and hub capabilities that allow the firm to turn around different European flights very quickly. BA maintains a total fleet size of 292 planes and maintains its own, self-owned and self-managed maintenance division that allows for rapid line maintenance of its fleet at 70 different airports (British Airways 2011). Other airlines outsource these functions at airports and in outlying maintenance hangars, which allows the company to control labour costs in relation to sustaining the viability and safety of its airline fleet. This represents significant operational cost savings. Furthermore, the firm actively seeks mergers in order to streamline operations and share resources to make BA more efficient and improve capacity. In 2010, the company merged with Iberia Airlines which improved its transatlantic capacity. The Iberia merger now provides BA with an annual operational cost savings of £560 million (Wilson 2010). The ability to consolidate many aspects of operations, including service delivery, labour, and fleet availability (which prevents ordering expensive new planes) now gives BA the ability to compete on price through cost leadership which was unheard of when BA dominated the European aviation industry before the emergence of new low-cost and no-frills carriers. Hence, the firm’s competitive position is positive in terms of consumer passenger pricing structures as a result of economies of scale achieved through increased size, scope, capacity and merger-supported consolidations throughout the entire operational model. 3. Resource audit The most fundamental resource that sustains British Airway’s competitive position is the firm’s brand reputation which is the most significant asset for the company. British Airways acknowledges that the firm operates in a market environment where ever-changing consumer behaviour impacts corporate strategy (British Airways 2009). According to the firm, airline brands that are able to gain the trust of consumers and are considered to be both “robust” and “reliable” are capable of attracting more consumer loyalty (British Airways 2009, p.19). Furthermore, airlines capable of giving consumers the perception that they are receiving more value for their money achieve such loyalties (British Airways 2009). Hence, British Airways has invested considerable expenditures into the marketing function in operations in order to build this respected, trusted and reliable brand reputation. Brand management is one of the most significant and core practices of operations which gives a firm the ability to create continuity between the business identity and the external market where consumers are considered the most influential constituents that drive revenue success (Abimbola 2001). When a firm is capable of generating the consumer perception that they have market-related assets unique to competitors, it leads to higher revenues for a company (Abimbola). How, then, should British Airways’ brand identity be considered a very valuable resource? British Airways has utilised promotions, loyalty programmes and integrated communications to build strong relationships with its target consumer segments. The tangibles of service, such as offering quality in-flight meals, ensuring timely departures and arrivals as well as staffing consumer-centric service labourers, are crucial to have a brand that is successful and outperforms competing companies (Bridson and Evans 2004). Figure 1 illustrates how BA has managed to build a strong brand that is now a resource in competitive strategy. Figure 1: BA brand management – incorporating an image of competency and value Source: Owen, E. (2010). Source: McLeod. (2013). Source: Vebidoo. (2014). As shown by Figure 1, the brand reputation of British Airways as its primary resource cannot be understated. Decades of brand management and promotional competency continue to iterate that the firm can be competitive in terms of price, competency and service quality with a dedicated ideology of satisfying and servicing the value-seeking consumer. According to marketing experts, in an environment where competitors are capable of emulating the services and products of competition, the only real asset a firm has is its brand (Nandan 2005). British Airways not only has managed to have a substantial brand asset through communications to build trust and perceptions of competency, the firm uses tangible market-based assets to create loyalty with important target consumer constituents. For instance, the company offers many perks to ticket buyers such as the upscale Concorde Room, the Terraces Lounge, the Executive Club Lounge, and other first-class service facilities in many European airports. These amenities serving quality food and drink are offered to repeat purchasers through the company’s many different tiered reward programs which illustrate the firm’s commitment to high quality service and tangible products. When a company has structured and competent loyalty programs, it gives consumers a sense of personal ownership of the business and a sense of social belongingness (Hart, Smith, Sparks and Tzokas 1999). Furthermore, an empirical study conducted by Ekinci, Dawes and Massey (2008) found that consumer perceptions of legitimate service quality directly impact future intentions to make purchases toward the service firm. The quality of interpersonal interventions between customer and a firm’s service staff are fundamental to the success of a firm’s brand and its loyalty program (Shoemaker and Lewis 1999). Hence, whilst other carriers are looking to control costs and provide lower prices to consumers my cutting service labour volume and removing frills, British Airways is still able to offer high-class service whilst using its new cost leadership strategy to give consumers value at a fair price. BA seems to understand that service quality, competency and tangibles of services are crucial to gaining positive consumer perceptions of the brand, thus offering high class lounges in airports and rewarding repeat purchasers with improved food, beverages and other amenities. Unlike its competition, the marketing-based resource of superior brand identity is fundamental to how the firm competes and maintains high (though decreasing) market share in Europe and other international destinations. A study conducted by Tanford, Raab and Kim (2011) found that members of a loyalty program develop very strong emotional attachments toward the firm offering the program when these programs keep their brand promises. British Airways illustrates to consumers through first-class service quality and competency, whilst also focusing on keeping lower prices, that the company gives superior value to their loyal customers than that of competing firms. Hence, tangibles of the marketing function when combined with decades of brand-building serves as the most substantial resource of this particular airline company. Coupled with having the largest fleet of planes in the region (compared to competition), the ability to consolidate many aspects of the value chain through mergers and acquisitions, and a supply chain that provides superior quality amenities to in-flight consumers, the company is well positioned as a value provider to its target customers. The business is also working to consistently diversify its in-flight amenities including its Club World seats which have available full-sized beds, Internet access and computing systems and in-flight entertainment technologies (British Airways 2010). Maintaining high revenues and having available credit and other cash resources in greater capacity to emerging and existing competitors gives the company a brand identity of modernisation and convenience that makes the airline more attractive to multiple buyer segments looking for superior value to other airline companies. 4. Value systems analysis Superior value as perceived by important customer constituents has been identified as being a source of competitive advantage for a firm (Porter 1987). In order to provide this value, a firm must be considerate of its value systems, which are inclusive of supplier value chains, the firm’s own value chain, a company’s distribution channels, and consumer perceived value and needs (Bendoly, Soni and Venkataramanan 2004). Hence, value systems are both internalised and externalised and include such elements as e-commerce, business resource planning systems, collaborative logistics, customer relationship management, and a firm’s supply chain factors. British Airways commits an annual £4 billion on procurement to sustain its services, improve fleet capacity and other raw materials needed to provide first-class products to its consumer segments. British Airways has managed to develop a supply chain that consists of 14,000 different international and domestic suppliers (Anderson and Day 2009). Diversifying the supply chain avoids supplier power from dictating pricing and lowers the switching costs for BA in the event that one particular supplier becomes too expensive or uncooperative in procurement strategy. Prior to 2009, British Airways had a decentralised procurement model which did not place managerial controls into a singular procurement division, which was affecting planning and expenditures in procurement (Anderson and Day). This decentralised model was raising warehousing costs and other variable costs that lessened its cost leadership advantages. By centralising the procurement division, the company was able to create alliances with vendors, including involving suppliers during the new product development process, allowing the business to take advantage of tacit knowledge and expertise within suppliers to assist in creating more worthwhile and quality services and products to consumers. Copacino (1996) iterates that such alliances achieve more rapid product developments and control operational costs throughout the supply chain. Cost control in the operational model has already been identified as being a significant source of competitive advantage for British Airways. It, once again, cannot be understated that the company’s brand identity and its relationship to satisfying the needs of diverse and discriminating customers segments is critical to providing consumers with perceptions of value. British Airways appears to recognise the modern phenomenon of ethical consumption, which is the propensity of consumers to select one company over another based on their public perception of morality and commitment toward sustainable business. In fact, a study conducted by Oh and Yoon (2014) found that when a company shows superior ethical ideologies, consumers are more willing to pursue making purchases from these companies and sustain more positive value-based perceptions of the ethical firm. British Airways has undertaken a significant project to begin procurement of fuel constructed through reprocessing of landfill waste. In alliance with Solena Fuels, British Airways will be instrumental in investment in a fuel conversion facility in the UK that will have the capability of transforming over 570,000 tonnes of waste into liquid airline fuel (Petru 2014). British Airways has committed to investing $550 million USD into this project which has been giving the firm considerably positive ethically-oriented public relations coverage. This commitment will supply British Airways with a minimum of two percent of its total fuel procurement in 2017 when the new processing plant opens and BA has committed to increasing this volume over time as a means of improving the UK environmental condition. The business’ efforts to satisfy consumers by illustrating an ethical brand reputation whilst also adjusting its procurement to include new and diversified, greener procurement options illustrates how the firm provides a perception of value to consumers. As BA would be the only airline engaged in this reprocessed fuel option, the firm might have a considerable competitive advantage by better satisfying consumers and sustaining a brand with trust and environmental commitment for European customers. 5. BCG Matrix analysis Henderson (2013) acknowledges that a successful company must have a portfolio of services and products that have disparate growth rates and different market share levels. Such an amalgamation is supported in the cash flow balances of a firm. If a company desires high growth services, it requires a business to inject high cash inputs to achieve growth (Henderson). British Airways, though offering diverse services in terms of in-flight and lounge-related amenities, has high market share and slow growth. Hence, this would characterise BA as a cash cow along the BCG Matrix model, units or services that generate considerable cash higher than the cash needed to operate the business at a break-even level. As a cash cow, the services in this portfolio contributing to high cash flows should be milked, with an emphasis on investing as little cash inputs as possible to sustain the portfolio (Armstrong and Brodie 1994). BA as a cash cow is supported with the cost leadership strategy being undertaken by the firm to lessen operational costs without sacrificing the diversity and quality of services provided to desirable customer segments of the business. Growth is difficult to achieve in an environment where BA is losing market share to emerging low-cost competitors, however the firm does achieve significant revenues by building loyalty through marketing-based brand management. The tangible quality of services (i.e. food and in-flight modernisations) allows the company to generate substantial cash whilst controlling the expenditures devoted to providing these amenities to customers in the firm’s existing service portfolio. In a market where it is difficult to achieve growth, the cash cow position is the best position for the firm as the firm does not have to inject high cash inputs to sustain the services in its portfolio. 6. Directions for future strategic growth and recommendations BA has two options for achieving future growth. The first option is seeking more consistent acquisitions, mergers, alliances or joint ventures to improve its international exposure. There are many emerging markets (such as India, Turkey or even African nations) that have improved education, consumer income levels and GDP that would support more ticket purchases if BA builds a presence in these nations. Such activities would improve revenue and brand exposure and allow the company to build strong relationships with wholly-new consumer segments needing airline services domestically and internationally. This would, however, require significant investment expenditures, however in some emerging economies this could present an opportunity to make BA the foremost name in airline travel. The second option for BA to achieve growth is to seek a diversification strategy rather than cost leadership in the European economy. The company could use its strong brand reputation to enter the financial services market, investment services market, or even retail banking for consumers. As the company has strong brand reputation and recognition, built on decades of trust-building, the company might gain many consumer loyalties to allow BA to handle their investment and other financially-related transactions. The global supermarket chain, Tesco, entered this market as a diversification strategy and found considerable successes from customers that already trusted the brand and its perceived competency as a premier grocery retailer. However, entering the financial and investment banking services market would require a radical alteration to management structure, organisational structure, procurement, customer service and other value-chain related activities. As BA has little experience in financial management, the company would have to develop an aggressive human resources recruitment ideology to gain expertise in this industry with the competency to make decisions, control business operations, and connect with important customer constituents. The firm would also be competing with major banking institutions such as Barclay’s and the Bank of England (to name only two) with well over 100 years of banking experience and customer relationship management. With emerging competitors offering budget services consistently entering BA’s markets, it would be more beneficial, long-term, for the firm to seek a diversification strategy and enter the financial services and investment marketplaces. BA does have experience in building trust and loyalty through brand management activities and integrated communications and could give consumers the perception of competency founded on existing British Airways’ service and customer commitment ideologies. This would require a significant capital infusion, launching a service unit would likely be a Question Mark along the BCG Matrix, with rapid growth opportunities but an initially low market share. The new service unit in this sector would likely consume large amounts of cash for the first several years of operations, but can become a market leader through effective advertising and promotion (perhaps even gaining existing loyalties from its airline consumer segments). The new financial services unit can become a star or a cash cow if the firm uses promotion effectively to maintain its market share. This would put BA in a position where the company is generating high levels of cash in a wholly-diversified new service industry in the event that emerging and existing airline competitors are able to continue to seize market share from BA. 7. Conclusion As shown by the research, BA as a Cash Cow and the ability to maintain a new cost leadership strategy puts the firm into a rather insulated competitive position. 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