The Strategy Process: British Airways - Case Study Example

The Strategy Process: British Airways Introduction This report looks into the external and internal environment of British Airways to come up with the future recommendations for the company to enhance its profitability and to sustain overall growth. British Airways: Vision and Strategies The vision of British Airways is to emerge as the leading international premium airline throughout the globe. British airways has come up with several strategies towards the fulfilment of this long term vision. The organisation is committed to achieve the same through efficient cost base and its focus on the excellent customer service (UBS, n.d., p.2). All these would decide how quickly the airline would be able to revive from the recent economic downturn. Moreover, these significant strategies would help the organisation to establish a sustainable as well as profitable future for its business by benefiting its employees, partners, customers, shareholders and other stakeholders. In the coming years, the airline company would remain its focus on the aviation industry. The core business would remain on moving people and cargo. The airline company would offer to attract the customers from across the globe. They want the people across the globe to wish to fly with British Airways whenever it is possible. The company has come up with few significant strategic goals which the organisation would strive to attain and wish to be. British Airways aims to be desired carrier for the long haul premium customers. The organisation has identified the long-haul premium customers, key to its profitability. The organisation tries to align its product, service and network according to customers’ requirements. Furthermore, the carrier would also keep its strong presence in cargo service and short-haul segments. All these sectors play a crucial role to support the core business of this organisation. British Airways is looking forward to its extension in other cuties. However, at the same time, the company works to gain and sustain its leading position in London. The city is seemed to be its financial centre of its business as this is one of the biggest airline industry across the globe. It is very crucial for British Airways to ensure that Heathrow remains as a crucial global hub. As a consequence, the airline company has been influential to influence the government decisions regarding the relevant policies as well as works along with the airport owners to continue on the infrastructural development activities (British Airways, 2010). The drive for extension worked out well with the merging of British Airways and Iberia. Joining with Iberia would fetch total revenue of $ 18.5 billion placing it third across the Europe. With this consolidation, the group has given a tight competition to Air France –KLM and Germany’s Deutsche Lufthansa AG (Rothwell, 2011). British Airways would continue to satisfy the requirements of its customers and enhance the margins through the introduction of new revenue streams in the business. The group would be introducing profitable additional services to the customers which would add value and strengthen this leading brand. The new products and services would be introduced to utilize its assets and organisational capabilities to satisfy the requirements of the core customers, which would, in turn, enhance the customers’ loyalty. British Airways also communicates with the travel agents to understand the new services offered by the competitors (Perreault, 2006, p.284). Analysis of Internal Environment Financial Analysis The following tables accumulate the key financial data and ratios for the organisation. The gearing ratios are important to analyse the capital structure of any firm. The ratios have been calculated for five years’ span of time starting from 2006 to 2010. The ratios have revealed the relationship among the long term financial forms against the equity holders’ capital. It can be noticed that British Airways has moderately high level of debt on the balance sheet. The company’s operation is mostly financed with debt. In the wake of recession, the company has started accumulating more long term secured debt reducing the shareholders’ capital. The company had saved on the cost by acquiring more long term debt. As of now, the company has enough equity to pay off its debt obligations. However, acquiring more debt can be proved to be risky for the organisation. Table 1: Capital Gearing Ratios Table 2: Financial Gearing Ratios Table 3: Key Financial Data Table 4: Efficiency Ratios The company has higher stock days, which would mean that a significantly large amount of money is tied up in its inventory. The average number of days to collect the receivables is calculated by ‘debtor days’ (Chartered Management Institute, 2005). The debtor days ratios have been high throughout the years, making it a risky proposition for the company. The working capital management seems not to be appealing for British Airways. The organisation must look into this factor to ensure required liquidity on the balance sheet. The company does not prefer to pay a regular dividend to its shareholders. However, it may pay the same with considerable increase in its profit amount. In the year 2008, the company had attained a net income of £ 712 million out of which £ 58 million was paid to its shareholders as dividend. In the year 2009 and 2010, the company has made huge loss. The company must approach new strategies to enhance its position in the coming years. The following figure resembles the share prices from 2006 to 2010. In the year 2009, the situation seemed to be quite gloomy for the company as the shareholders seemed to lose their confidence on the airline group. However, the situation has improved a bit in the very next year. (Source: Yahoo Finance, 2010) Resources and Core Competencies The prime goal of any resource analysis is to understand the company’s potential to create competitive advantage rather than valuing its assets (Grant, 2009, p.128). The company has huge amount of assets. However, the significant most attribute would be the way to utilize the same to increase profitability and enhance competence. The company has 238 carriers connecting more than 300 destinations across the globe (International Airlines Group, 2010). Furthermore, the human resource of the company is quite strong as they are provided with specialized aircraft training. The company’s competitive advantage lies in the comfortable arrangements within the carriers. However, the company’s core competence lies in the business model it uses. The company operates its network management, leisure activities and e-commerce activities all by itself, internally within the organisation. Activities like consulting, cargo and engineering are under three different profit centres which not only serve British Airways, but also other organisation. The rest like ground staff activities are done by the specialist suppliers (Bomhof, n.d., p.1-2). For organisations, which are not using this kind of business model, it would difficult to imitate the same. Value Chain Analysis The value chain analysis of British Airways consists of few significant activities including firm infrastructure, human resource management, technology development and procurement. British Airways has followed a structured hierarchy leading to optimize the usage specialist knowledge to fetch the competitive advantages compared to its counterparts. The company had also invested considerably in the training and development of its human resources making it desirable to its employees. It would not be wrong to say that the company has a number of resources which an easily be used to enhance the technology and bring in innovation in the same. British Airways has taken the leverage of its relationship with its suppliers and brand name to create an effective procurement network with increased economies of scale and enhanced efficiency. The company has also come up with loyalty club card and improved communication services, increased baggage security and enhanced customer service to add value to its passengers across the globe. SWOT Analysis The following are the strengths, weaknesses, threats and opportunities of British Airways. Strengths Brand Name Efficient and Skilled Employees Operations are spread worldwide Strong presence in one of leading airport, Heathrow International Airport (Recreation Tourism Research Institute, 2011). Weaknesses Declining Profitability in the year 2009 and 2010. Reduced growth in the revenue from the key operational regions. Threats Fluctuating fuel prices Shrinking demand side Rising competition from low cost airlines The economies of US and Europe are still on their reviving stage Increasing environmental concerns. Increased tax for landing (Punzel, 2011, p.12) Opportunities The company can extend its presence further to the Asian market. Opportunities are there in the global market. External Environment Analysis PESTLE Analysis While developing the strategy, it is pretty significant to understand the market and the external forces shaping up the industry. The PESTLE macro environment framework is articulated in this segment. Political and Legal Factors The airline industry has changed considerably since deregulation and privatization have been introduced to this industry. Recent developments in the industry show that the government is encouraging the merging of the airlines. The respective government has come up with rules, according to which, the ailed airlines would not be subsidized, which, in turn, is expected to increase the numbers of mergers and acquisitions in the industry. Furthermore, in the wake of this rule, the airline say face enough trouble as they are yet to entirely revive from the financial turmoil. Economic Factors Since September 11, 2001 the global airline industry, precisely the airline industry in UK and US, has experienced declining demand due to reduced consumer spending and the customers growing reluctance to fly. Ever rising security concerns, cost cutting by the corporate, fluctuating fuel prices and trembled economic condition had introduced a difficult situation for the company to sustain their growth and profitability. Adding to it, Europe has been one of the significant regions which have been adversely affected by the economic recession. The purchasing power of the travellers has been reduced due to this trembled economic condition. As a consequence, the number of passengers has been reduced in the last few weeks. The increasing oil prices have worsened the situation further leading to an increase in the operational cost of the airlines. With the rising oil prices it was pretty difficult for the airlines to maintain their economies of scale and sustain a cost effective way of operation. Social Factors The growing number of aging population, increasing trade unions and rising unemployment has contributed to declining of the demand side putting further impact on the European airline industry. Technological Factors Airline industry is a capital intensive industry. In the recent years, there have been significant technological advancements changing the operational way of the airline companies. No-a-days, most of the tickets are booked online reducing the agency and distribution cost for the organisations. In the year 2006, British Airways reported that its considerable investment in the technology has contributed to the 20 % increase in the group’s profit. The airline had sold around 87 % of its tickets online which, in turn, resulted in cost effective and simplified way of operation. To reduce the cost further airline are looking at technologies enhancing their fuel efficiencies. In the future, it is expected that aircrafts using liquid hydrogen can take the lead. Apart from that, there are more technological advancements to reduce the carbon emission and measure the same. Aircraft Emission Measurement is such an advancement which would help the airline to appropriately measure their carbon emission. Environmental Factors In the wake of environmental awareness, curtain down the carbon emission is quite significant for the airlines’ operation. The carbon emission is more in the short hauled flights rather than in the long hauled ones. Another significant concern has been the noise pollution. Airline companies are pretty under pressure to introduce engines with less noise and improved fuel efficiency. The aviation industry is also looking forward to the alternative renewable fuel sources to minimize adverse environmental effects. Porter’s Five Forces Entry Barrier Airline industry is capital intensive in nature and hence, it demands a considerable amount of investment. Apart from that, the existing players are enjoying considerable economies of scale leading a high entry barrier for the new entrants. Bargaining Power of the Buyers In this industry, the buyers are scattered and not unionized. As a result buyers’ power is medium in this industry. Bargaining Power of the Suppliers In the airline industry, the suppliers are Airbus and Boeing. As a result, the suppliers’ power is quite high. Threat of Substitutes There is no specific substitute of the air carriers. However, people may opt for train or other transportation to reach destinations. Competitive Rivalry There is enough competitive rivalry in this industry. British airways has to compete against the traditional airlines as well as the low cost airlines to sustain its profitability. Stakeholders’ Theory Any company has different stakeholders including its employees, suppliers, customers, shareholders etc. The company must offer dividend or enough capital growth to satisfy its shareholders. Furthermore, the company is required to keep long time relationship with the suppliers to be benefited from enhance supply chain network. The company has realized the value and significance of its customers and would like to deliver an excellent service to its customers at every touch point. To achieve the same, the organisation has focused on its customer facing employees. The organisation want to enhance the way it leads, trains and rewards its employees to deliver excellent customer service. This, in turn, is expected to service enhancement as it would ensure that the customers enjoy premium experience. In the coming years, the organisation would invest more to offer a comfortable and excellent service to its customers. Future Proposals In the future, British Airways would bring its people and processes together to introduce enhanced business processes. In the future, the company is expected to invest more in research and development to identify alternative fuels for its operation. The company has also been in partnership with Rolls Royce to achieve the same. The company is also committed to serve 120 communities and align its product and service in accordance to the environment rules and regulations. New products and services will be introduced to enhance the customer service in a better way. The company will also be auditing the products supplied by the suppliers to satisfy the ethical requirements. In the year 2008, the company had introduced a workplace recycling program which would also be continued in the future. Conclusion and Recommendations As of now the company’s financial state is weak due to certain economic situation. However, it is high time for the airways to review its strategies and reframe the same. To attract the individuals and business travellers from across the globe, the organisation is required to make sure that its guests enjoy a comfortable and unique premium service. The company’s offering must add value to its customers and they must perceive the service worth paying little bit more than other low cost airlines. In the coming years, the organisation must put its effort to introduce new products and services to serve its customers in a better and enhanced way. To sustain its growth and revive its profitability, the organisation is required extend its presence to the significant cities. British Airways must aim to offer one of the best global connectivity for its customers. The airline company must put its effort to establish its presence to the leading cities across the globe. This can be done through direct service or through partnering with other networks. Although, the main focus should be kept on cities like London and New York, special effort would be given to extend to other global cities in the coming years. Reference Bomhof, L. (No Date). The Airline Business Model. [Pdf]. Available at: http://www.aerlines.nl/issue_25/Heading_towards_Virtualization_or_Integration1.pdf [Accessed on April 16, 2011]. British Airways. (2010). 2009/2010 Annual Report and Accounts. [Pdf]. Available at: http://media.corporate-ir.net/media_files/IROL/69/69499/BAI_AR_2010_final.pdf [Accessed on April 16, 2011]. Chartered Management Institute. (2005). Managing Working Capital. Available at: http://www.barclays.com/latitudeclub/pdf/pdf_182_managing_working_capital.pdf [Accessed on April 16, 2011]. Grant, M. R. (2009). Contemporary Strategy Analysis. John Wiley & Sons. International Airlines Group. (2010). About Us. [Online]. Available at: http://www.iagshares.com/phoenix.zhtml?c=240949&p=aboutoverview [Accessed on April 16, 2011]. Perreault. (2006). Basic Marketing. Tata-McGraw Hill Education. Punzel, T. (2011). Risks and Decision Making: Using the Example of British Airways. GRIN Verlag. Recreation Tourism Research Institute. (No Date). SWOT Analysis. [Pdf]. Available at: http://web.viu.ca/rtri/SWOT%20Analysis.pdf [Accessed on April 16, 2011]. Rothwell, S. (2011). BA-Iberia Overtakes Air France by Market Value as IAG Stock Starts Trading. [Online]. Available at: http://www.bloomberg.com/news/2011-01-24/british-airways-merger-with-iberia-takes-off-as-iag-group-begins-trading.html [Accessed on April 16, 2011]. Yahoo Finance. (2010). British Airways (BAY.L). Available at: http://uk.finance.yahoo.com/q/ta?s=BAY.L&t=5y&l=on&z=m&q=l&p=&a=&c= [Accessed on April 16, 2011]. UBS. (No Date). Vision, Mission and Purpose. [Pdf]. Available at: http://www.uniquebusinessstrategies.co.uk/pdfs/Strategy/VisionMissionandPurpose.pdf Accessed on April 16, 2011]. Bibliography Australian School of Business. (No Date). Industry Analysis. [Pdf]. Available at: http://www.agsm.edu.au/bobm/teaching/ECL/lect02.pdf Ehmke, C. Fulton, J. & Akridge, J. (No Date). Industry Analysis: The Five Forces. [Pdf]. Available at: http://www.extension.purdue.edu/extmedia/EC/EC-722.pdf Gaskins, D. (1999). Competition in the U.S. Airline Industry. [Online]. Available at: http://www7.nationalacademies.org/ocga/testimony/Airline%20Competition.asp Hoovers. (2011). Company Description. [Online]. Available at: http://www.hoovers.com/company/British_Airways_Plc/crkjri-1.html ISTD. No Date. SWOT Anlaysis. [Pdf]. Available at: http://istdkochi.org/pdf/swot-analysis.pdf Recreation Tourism Research Institute. (No Date). SWOT Analysis. [Pdf]. Available at: http://web.viu.ca/rtri/SWOT%20Analysis.pdf. Mintzberg, H., Lampel, J., Quinn, J. B. & Ghoshal, S. (2003). The strategy Process: Concepts, Contexts, Cases (Global Fourth Edition) Prentice-Hall. Puffer, S. (2004). International Management: Insights from Fiction and Practice. M.E. Sharpe. Renewal Associates. (No Date). PESTLE Analysis. [Pdf]. Available at: http://www.renewal.eu.com/resources/Renewal_Pestle_Analysis.pdf. Vedder, H. (2008). Strategic Alliances in the Aviation Industry: An Analysis of Past and Current Developments. GRIN Verlag. Read More