The Effect of the Five Forces of Industry Competition on Saudi Arabian Airlines - Case Study Example

Running Head: B202_A_TMA01 B202_A_TMA01 s B202_A_TMA01 TASK II Introduction: Saudi Arabian Airlines Profile Saudi Arabian Airlines is the foremost national airline of Saudi Arabia, based in the capital Jeddah. It functions both domestic and international planned flights to over 70 destinations in the Middle East, Africa, Asia, Europe and North America. Domestic and international licensed flights are run, mostly throughout Ramadan and the Hajj season. The airlines main operational base is at Jeddah-King Abdulaziz International Airport (JED). Other major hubs are Riyadh-King Khalid International Airport (RUH), and Dammam-King Fahd International Airport (DMM). Saudi Arabian Airlines is a member of the Arab Air Carriers Organization and IATA. External Environment of Saudi Arabian Airlines This analysis provides a no exhaustive list of potential influences of the environment on the organization. Each of the forces is categorized by a particular macro-level external influence, which directly impacts strategic direction at Saudi Arabian Airlines. The political environment can have a significant influence on businesses as well as affect consumer confidence and business spending. The political environment is one of major advantages to Saudi Arabian Airlines, as the majority of its operations are contained within Saudi Arabia. This policy were known as “two airline policy” valid for three years and was directed at benefiting both Saudi carriers Sama Airlines and Nas Airlines. The new policy ruled that the two major Saudi airlines will not compete on any international route and they both had to have separate routes-Middle Eastern deregulation of the airline businesses from 2007; set up a number of low-cost airlines offering no-frills services. This deregulation enabled Saudi Arabian Airlines to open new routes to continental Saudi Arabia. Increasing oil prices inflated the costs of fuel and impacted profit margins-At the same time people in Saudi Arabia are willing to travel more for lower price and this was option for low-budget airlines like Saudi Arabian Airlines. Middle Eastern deleted duty-free on intra- Middle Eastern countries, and this new taxation policy affected Saudi Arabian Airlines in loss of revenue, increased landing charges and increased the number of flight attendants. The social and cultural influences of business vary from country to country. Social cultural factors in Saudi Arabian Airlines case include:-Increasing of the people’s mobility in Saudi Arabia, where good transportation is essential for every Saudi Arabian citizen and it was a great opportunity for Saudi Arabian Airlines to expand its business. Personal disposable income of people in Saudi Arabia was rising which increased travelling lifestyles and business travelling. Industry Analysis: The effect of the Five Forces of Industry Competition on Saudi Arabian Airlines. The five forces were identified by Michael Porter as the industry Five-Force model. This is a framework for evaluating industry structure according to the effects of rivalry, thread of entry, supplier power, buyer power, and the thread of substitutes. Rivalry is the intensity of competition within an industry. The Saudi Arabian airline industry is highly intense; market is highly competitive. Passengers have choices to switch to another mainstream (Gulf or Emirates Airlines) or low-cost budget airlines (Sama Airlines), because there is a low level of switching costs. Threat of new entry is the degree to which new competitors can enter an industry and intensity rivalry. There are difficulties to enter Saudi Arabian airline industry, since high initial investment and fixed costs. High barriers to enter suggest that only early entrants such as Saudi Arabian Airlines could succeed. There has been much industry shake-out and many airlines left the market. There are high entry costs due to the necessity to buy expensive aircraft and equipment, to pay high airport fees, and to advertise massively. In addition to some of the barriers to entry I would like to include restricted slot availability which makes it more difficult for airline companies to find suitable airports, the needs for low-cost base and flight authorizations. The threat of substitutes is the degree to which products of one industry can satisfy the same demand as those of another. In Saudi Arabian Airlines case the degree for subsidies is in medium to high level. By this I mean that the Saudi Arabian airline industry as a whole faced a lot of pressure. There was a high internal industry competition, encountered by other travel industries such as- cars, ferries, and high-speed trains in Saudi Arabia (especially on short-haul routes are posing an increasingly serious threat). Supplier power is the degree to which firms in the supply industry are able to dictate terms to contracts and thereby extract some of the profit that would otherwise be available to competitors in the focal industry. The bargaining power of suppliers is rather low because there are four major aircraft manufacturer (Boeing, Airbus, Bombardier and Embraer), which gives options for Saudi Arabian Airlines to choose if decide to switch suppliers. But the switching costs from one supplier to the other would be high, because all mechanics, engineers and pilots have to be retrained. Buyer power is the degree to which firms in the buying industry are able to dictate terms on purchase agreements that extract some of the profit that would otherwise go to competitors in the focal industry. Even if a lot of passengers are not satisfied with customer care of Saudi Arabian Airlines, company’s profits continue to rise. Customers know about the cost of supplying the service and the trade off between the price and quality of service. TASK III Stakeholders in Saudi Arabian Airlines The five most important Stake holders of Saudi Arabian Airlines are 1. The Royal Family 2. Presidency of Civil Aviation 3. International Air Transport Association (IATA) 4. Ministry of Defence 5. Major Aerospace and Defence Corporation (Boeing) Stakeholders Interests: Positive & Negative Gaining a thorough understanding of customer needs and knowledge of their customer markets and purchasing behaviours are also necessary components for achieving organizational and marketing success. An accurate forecast of current and future customer needs, values, and behaviors allows a company to develop solutions to satisfy these needs and is necessary in the creation of effective marketing strategies and long-term marketing objectives. Accurate forecasting can maximize customer satisfaction and loyalty and increase effectiveness in marketing strategies, both of which contribute to sales growth, competitive strength, and customer loyalty. Achieving the customer loyalty and competitive advantage that Saudi Arabian Airlines desires first requires understanding and forecasting of customer needs and effective environmental scanning. The accuracy of the information gained is a determining factor in the success of its restructured frequent flyer program and its marketing strategies. Saudi Arabian Airlines competitive ability is increasing lowered by rising fuel and labor costs and a restrictive cost structure due to its post-September 11th overexpansion. To impede further financial havoc and to avoid bankruptcy, the board of directors at Saudi Arabian Airlines has recently decided to mandate a 15% across-the-board cost reduction over the next 18 months (University of Phoenix, 2009). Executives at Saudi Arabian Airlines now face the challenges of improving its frequent flier program in order to lure back customers and restoring stock prices to last year’s level while strictly adhering to the 15% cost reduction mandate and the current union agreement. Stakeholder Perspectives/Ethical Dilemmas Many conflicts exist between the key stakeholders of Saudi Arabian Airlines. These conflicts have caused tough barriers to successful marketing strategies and customer retention, which is detrimental to the future of Saudi Arabian Airlines. The obvious conflict exists between the CEO of Saudi Arabian Airlines, Amanda Miller, and the customers of Saudi Arabian Airlines. Another large conflict exists between the Royal Family of Saudi Arabian Airlines and Minister of Defence. The CEO and CFO have a more pragmatic approach when it comes to operations and they do not see the value in marketing and customer relationship management. Quantifiable metrics such as call time logs and declines in sales are what they base their decisions on and they fail to listen to the wants of the customers and identify the underlying causes of declines in customer loyalty and profits. They will not reallocate any more funds to customer service or marketing functions and would prefer to use all possible money for the fuel hedging program. In addition, more marketing and customer perception research needs to be conducted to discover and resolve problems with Saudi Arabian Airlines segmentation strategy. However, these solutions and opportunities require funding and support from top-level executives. In order to be competitive in this industry, Saudi Arabian Airlines must employ marketing strategies such as market segmentation and product differentiation to separate itself from its competitors. This conflict is causing Saudi Arabian Airlines to become further dislocated from its customers and, without support from upper management, customer-focused or marketing strategies will fail. This conflict further addresses the CEO’s lack of customer-focus, which has initiated the problems and issues that Saudi Arabian Airlines is currently facing and caused frustration on all levels. Saudi Arabian Airlines lack of stakeholder alignment severely hinders any customer service or marketing from achieving success. As a result, customer loyalty will continue to decline and Saudi Arabian Airlines will no longer be able to be competitive. Saudi Arabian Airlines must address each stakeholders each stakeholders concern and come together as a team to develop one common strategy under which they can all operate. References Carpenter, M.A. and Sanders, W.G. Strategic Management: A Dynamic Perspective Concepts and Cases, 2nd edition. Upper Saddle River, NJ: Pearson Prentice Hall, 2009Thompson, J. 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