A Strategic Analysis of British Airways - Case Study Example

A strategic analysis of British Airways BY YOU YOUR SCHOOL INFO HERE HERE A strategic analysis of British Airways Introduction British Airways (BA) is the third largest largest airline company in the world (Rodriguez-Ginorio 2011). However, BA struggles to achieve growth and improve market share in an environment where new market entrants continue to provide increased competitive risks to the business. BA has also experienced a decrease in consumer demand as consumers defect to low cost carriers (CAPA 2009). This report conducts a critical analysis of BA’s competitive situation, conducting a thorough audit of the company’s resources and relevant vale systems, in order to determine the most appropriate strategy for achieving growth in the sluggish growth market which the company operates within in the United Kingdom. Research has identified that the firm’s most viable strategy to achieve growth is through adopting a new market development strategy that will give the firm a new presence in foreign markets without substantial economic investments to diversify its existing service portfolio. 2. An overview of the company’s strategic position British Airways, no longer a business operating in an oligopolistic market, is facing competition from many different competitors. Main competitors include Air France/KLM, Virgin Atlantic and budget airline companies such as RyanAir. Whilst British Airways (BA) continues to earn substantial revenues, the company struggles to achieve growth and improve its market share. Low-cost, budget carriers are emerging that offer much lower ticket prices to many customer segments, something that attracts price-conscious consumers to these airlines. At the same time, British Airways maintains very high operational costs due to the diversity of services offered to consumers, making it difficult for the company to utilise a low-cost ticket price strategy to compete with companies that have successfully achieved a cost leadership strategy, such as RyanAir and Easyjet. On 2013 revenues of £11.42 billion, the company only achieved a net income of £57 million (British Airways 2014). A significant £10.77 billion is spent on operating costs, including employee expenses, fuel, aircraft leasing, information technology, selling costs and depreciation (British Airways 2014). Consequently, British Airways is not competitive in terms of ticket pricing which is a significant source of competitive advantage in price-sensitive markets. Many airlines around the world seek mergers and acquisitions as a means of driving out new market entrants. In 2008, Delta Airlines and Northwest Airlines merged as well as the 2001 American Airlines acquisition of TransWorld Airlines (Park 2011). Through consolidation of resources through such mergers and acquisitions, these airlines gained market power and made it difficult for low-cost carriers to enter the market in order to reduce the competitive advantages of high-frills airlines in terms of ticket pricing. British Airways, however, has not been actively seeking such mergers and acquisitions, which reduces the ability of the airline to drive out emerging low-cost carriers. The company also spends a substantial £4 billion on procurement in order to provide amenities and services to consumers (Anderson and Day 2009). BA is a high-frills airline, offering a plethora of posh amenities to consumers in order to attract consumers willing to pay a higher ticket price. For instance, the company has recently incorporated Club World seats into its aircraft, which gives buyers access to the Internet, in-flight entertainment systems and even full-sized beds (BA 2010). In 2013, BA devoted a massive £5 billion expenditure referred to as a customer investment programme that included altering the supply chain to include more high-class food and beverages and even giving spa treatments to its customers (British Airways 2014). Offers BA, “We make sure all our customers enjoy a unique, premium service whenever they come into contact with us...the service we offer is worth paying that little bit more for” (British Airways 2010, p.2). Consequently, BA is unable to utilise pricing discounting as a competitive tool in order to maintain its high-class and luxury-oriented marketing-based brand reputation. This limits the airline to reaching more diverse target segments that are attracted to an airline as a matter of pricing, thus reducing its overall competitive position. 3. Resource audit of BA There is a significant volume of resources that contribute to British Airways’ ability to secure high revenues. Primarily, cash reserve availability is the primary advantage for BA, with enough cash to fully operate the business for 12 months without consideration of revenues (British Airways 2014). The company enhanced its cash position by 630 million in 2013 (British Airways 2014). In the airline industry, it is significantly important for a firm to maintain a high credit rating and illustrate to the financing industry that the firm is capable of paying for its financed assets, especially its airline fleet. In 2014, Fitch Ratings ranked British Airways’ credit rating as BBB, which measures a firm’s liquidity over an 18 month period and the ability of the firm to recover in stress scenarios (Business Wire 2014). This rating means that the business has been assessed to have adequate financial capacity to sustain all of its combined financial obligations with only a moderate risk of weakened capacity (Moody’s 2009). Consequently, Moody’s is better equipped to attain financing for capital asset procurement, including real estate and fleet aircraft. BA now boasts a massive fleet consisting of 252 aircraft and placed an order for 18 state-of-the-art Boeing planes that will be replacing an outdated fleet in 2017 (Thomas 2013). The firm’s cash reserves, therefore, contribute to the firm’s ability to expand its fleet, improve capacity for seeking new destinations, and improving its credit rating. Additionally, BA maintains a very strong and recognised brand that achieves a competent marketing-based competitive position. British Airways has devoted considerable expenditures in marketing over the last two decades to build a reputation for superior service provision. Companies that have built strong recognition work toward creating what is known as brand preference and when a company is capable of building this preference, it serves as the foundation of loyalty toward the company (Kapferer 2008). When a firm is capable of building a preference and more positive emotion in desirable consumer markets as compared to competition, it often leads to customer loyalty (Kapferer 2008; de Chernatony 2006). In the service industry, retaining loyal consumers is a predictor of greater cash flow growth (Wood 2000). In fact, Aaker (1996) asserts that companies with a positive brand reputation and has achieved customer loyalty have a competent asset at their disposal for preventing new market entrants. To achieve effective customer loyalty, a company must build trust in the brand, give a perception of superior service quality, provide value in service delivery and give a perception of economic value (Deng, et al. 2010). British Airways builds loyalty through multiple strategies in marketing. Most notably, BA has developed a tiered loyalty programme that provides attainable and high-class perks to those customers who make recurrent ticket purchases. BA provides perks to customers such as access to the Executive Club Lounge, Concorde Room and many other high-quality lounges in Britain as a reward for being a devoted customer. Loyalty programme successes for BA are built on consumer psychology whereby customers are more apt to build loyalty toward a firm that provides incentives to loyalty program members whilst negating other customer segments (Darke and Dahl 2003). British Airways consistently seeks to make rewards attainable and accelerate the life cycle of rewards to encourage consistent repurchases by loyalty programme members, something critical for loyalty development (O’Brien and Jones 1995). British Airways attributes a significant £985 million as a direct result of loyalty programme effectiveness (British Airways 2014). 4. Analysis of value systems Value systems for a firm are inclusive of its own value chain, supplier value chains, different distribution systems and the level to which customers perceive value provision by the company they make purchases from. A company’s value systems generally include electronic commerce, systems that plan resource procurement and allocation, supply chain, the ability to build relationships with customer segments and logistical systems. British Airways sustains advantages in terms of its e-business capabilities. The company utilises technologies in abundance that improve services in the cargo industry, including more efficient processing of freight and providing quantitative data to customers. In 2004, the company was awarded the best cargo carrier in Europe (PR Web 2004). E-business technologies allow customers to track their cargo shipments anywhere in the flight process. For consumer travellers, BA now provides superior service using e-business technologies such as self-check-in kiosks and was awarded a gold rating by the International Air Transport Association for achieving a superior fast travel service ideology that makes use of new technologies to enhance the customer experience (Passenger Terminal Today 2011). Hence, it is not only creating the perception of superior service to customers that gives the company a strong brand identity, it is using technologies as a value system to achieve recognition and build a positive reputation for expedited service ideologies. In terms of supply chain, British Airways also has some notable advantages. British Airways has begun seeking many international suppliers to enhance service delivery, which now consists of over 14,000 different vendors (Anderson and Day). Through this diversification of the firm’s supply network, it gives British Airways more price controls in the supply chain as the company has many more vendors by which to choose from or negotiate pricing. This allows the company to offer a more diversified set of amenities to ticket purchasers (whilst also controlling some elements of supply chain-related costs) that enhances service value to customers. Furthermore, British Airways has constructed a massive 100,000 sq. foot logistics and warehousing centre that is located strategically next to Heathrow Airport. The company has devoted a higher labour capacity to ensure a 24/7 operation that provides distribution, warehousing and logistics services for the company (British Airways 2012). Such a facility not only allows BA to provide services to its own company, but to other airlines in need of dangerous goods handling, inspection services and storage (British Airways 2012). Coupled with this logistical centre, BA also maintains a wholly-owned maintenance facility with 2,000 different engineers that provides rapid aircraft maintenance, washing of aircraft, and interior refurbishment projects. This gives BA more control over turnaround for maintenance of aircraft, hence sustaining capacity, which is an advantage over competitors that often outsource these functions. Such outsourcing limits the ability of BA to expedite repairs and refurbishments that can curb the ability to ensure flight capacity. A superior and self-managed logistics centre and maintenance system provides value to consumers in terms of maintaining an on-time reputation, ensuring flight safety for passengers and giving the firm more flexibility to better utilise its fleet to seek new destinations. 5. Analysis of product/service portfolio British Airways operates in a market where there is low growth, yet the firm sustains high market share over competition. BA, therefore, is a cash cow as modelled against the BCG Matrix (See Figure 1), or a service unit that is capable of producing cash growth that is more substantial than the cash required to sustain operations. BA, as a cash cow business, has opportunities to exploit its high cash flows without having to provide the company with substantial cash injections to sustain its service ideologies. Figure 1: The BCG Matrix Source: JT Hawes Consulting. (2014). Key question for strategy leaders: how do we characterise our product portfolios effectively? [online] Available at: http://www.jthawes.com/BCGmatrix.html (accessed 18 January 2015). The cash cow position of BA provides the company with a superior return on assets that is exceptional in comparison to the growth rate of the firm’s market. Producing new services continues to create profitability for the firm even after the primary investment has already been provided for the service. BA is capable of creating high and consistent revenue streams and helps produce the cash reserves necessary to expand or growth the business (British Airways 2014). This has the potential to allow BA to spill over these cash resources into other areas of the company (such as creating different business units) or leverage cash availability for expansion strategies in a business environment where lenders already find a favourable credit rating for the firm (Business Wire 2014). Examples of how the firm has become a cash cow is in service improvements and modernisation, such as Internet access, beds, high-class food product changes, and in-flight entertainment systems that contribute to brand loyalty with desired customer segments with adequate resources to pay a moderately higher price for higher value of services. As a cash cow, BA does not have to be concerned with high financial capital investments to sustain the portfolio of services provided to customers for an extended period of time. Economies of scale, achieved through growth in previous operating years when the market was not as saturated with competitors, gives the firm the ability to leverage its assets appropriately without substantial input of excess capital to sustain high revenues. 6. Future direction for potential strategic growth It has been established that BA operates in a low growth market. Based on the firm’s current resources, constructive value systems, and cash reserves/credit positions, the firm has two strategic options to achieve growth. First, the company maintains the opportunity to seek a market development strategy, expanding its existing service offerings into wholly new markets. With a positive credit rating and high cash reserves, the business is equipped to seek acquisitions or mergers with other international airline companies to provide services to emerging or developing nations. Low liquidity risk makes BA more capable of achieving financing or loans for such a strategy and would increase fleet size and capacity of the organisation to gain growth through new market entry (Matz and Neu 2007). For instance, in Australia, the large airline company Qantas recently had their credit rating downgraded to junk status (Fickling 2013) and the airline is struggling to stay afloat. BA can seek out mergers or acquisitions with such carriers in new markets where the firm has no presence today which would ensure higher revenue growth and an opportunity to build a positive service reputation with completely new markets. Secondly, the company can use its brand equity achieved through decades of competent service and brand identity to diversify into wholly different service industries. Brand equity provides a firm with a strong reputation stemming from a highly recognised name (Keller 2012) and when a company has strong brand equity, it creates opportunities for revenue growth in higher capacity than companies with a lesser-known name (Leuthesser, et al. 1995). For instance, there are many countries with a need for competent waterway transport services for various cargo and equipment deliveries. BA has a solid reputation for competent delivery services and an internationally-recognised brand for excellence. This would provide a new diversified business unit that would handle non-air transport and generate a whole new revenue stream. Though this would be a Question Mark in the BCG Matrix model with high market share potential and slow growth, over time it could provide long-term revenues for BA and insulate the firm from volatile changes in the airline industry. 7. Conclusion and recommendations Based on the firm’s strategic position, the most viable growth opportunity for the firm would be a market development strategy; entering new markets with existing services. To diversify into a waterway transport company, the business would require substantial economic investment to procure shipping fleets, build a port presence, recruit talented labour, and ensure regulatory compliance to a wholly new industry. (To name only a few initial investments). Whilst the long-term pay-off would likely be considerable with such a highly recognised and trusted marketing reputation, the ability to achieve return on these preliminary expenditures could take upwards of a decade. However, as described by Aaker (1996), British Airways strong reputation could support a potential diversification strategy into the future. BA also maintains limited senior management experience in this industry, which would require benchmarking, potentially outsourced training in HR to inject these competencies into the BA management structure, and many other operational investments to sustain such a venture. By seeking new markets, the company can utilise its existing supply chain and its existing fleet (as well as impending fleet order deliveries) to provide services to foreign nations. This would require investment into creating hub presences in other countries, however the firm’s existing cash resources could be more effectively exploited toward this growth strategy. The firm could stay the cash cow that it is currently without having to inject considerable financial capital into a new market entry strategy and the firm maintains the competencies and knowledge necessary to provide foreign airline services. With high cash reserves (British Airways 2014), excellent credit (Business Wire 2014), a worldwide-recognised marketing identity and high capacity of airline fleet, BA is much better positioned for new market development ideology; therefore this is the recommended strategy for this airline company struggling to improve market share and achieve growth. In a market where BA simply cannot lower its ticket prices to compete with other airlines, both budget and high-frills, the firm requires a growth strategy and competitive strategy that will continue to provide superior revenues in relation to the investments injected into the service portfolio to remain relevant with customer segments. 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