Competitive Advantage of Air Deccan and Virgin Atlantic - Case Study Example

Firstname Lastname Instructor’s Name Course Number 6 September 2009 Case Analysis Competitive Advantage is an advantage gained over competitors by offering consumers greater value, either by offering the product or service at lower prices or by providing greater benefits and services that justify the high price of goods or services. Competitive advantage can be obtained and sustained by devising competitive strategies that take offensive or defensive action in order to create a defendable position in the industry, generate greater returns on investment and cope with competitive forces in the industry (12Manage). This paper will analyze two firms from the airline industry, namely Air Deccan and Virgin Atlantic and give insight into how they have created and sustained their competitive advantage and the challenges they have faced in sustaining the same. Air Deccan Air Deccan, the first low-cost airlines in India, was started by Captain Gopinath, a former Indian army officer in the year 2003. Many people in the aviation industry had doubts regarding whether the airlines would take off. However, these doubts were assuaged when it started making Rs.2.5 to 3 crores daily, connecting 55 destinations in India through 265 flights everyday (Ramachandran, 2005). Air Deccan was able to create and sustain competitive advantage in several innovative ways. The primary reason for the successful creation and maintenance of competitive advantage by Air Deccan is its adoption of a low-cost business model that was inspired by the US based Southwest Airlines, who were the pioneers of this successful business model in the 1970s. According to Knorr & Zigova (2004), deregulation of airline pricing is the reason for the emergence of this low-cost business model. Despite being modeled after the US based airlines, Air Deccan was successful in customizing the model according to Indian conditions. This ‘no-frills, low cost’ business model adopted by Air Deccan did away with flight meals, reduced the crew to a required minimum and added more seats to the aircrafts. The primary target customers of Air Deccan were leisure, corporate and small business customers belonging to the middle class and cost-conscious customers of the more affluent class. In order to gain this target market, Air Deccan reduced its fares and offered fares that were almost 30% lesser than the other full service airlines. In order to make these reduced fares more viable and to ensure profit, it adopted a single fare system which reduced the accounting and auditing costs involved. The airline also reduced and achieved a turn around time of 40 minutes which was again lesser than regular airlines which had a turn around time of 55 minutes. Next, it outsourced some of its non-core activities and operations to third parties. For instance operations such as airport ground handling, supply of food and beverages, magazine supply etc were given to third party vendors (Sampler, 2006). It also used a considerable amount of technology for its many operations. In 2005 it established a new contact centre in Bangalore for better customer service. This contact centre utilized Aspect Unified IP to provide a robust contact centre to customers, that would support many interaction channels with customers such as, voice mail, e-mail, web chat as well as self-service (Aspect Software, 2009). It also reduced costs by using unconventional distribution channels. It distributed and sold tickets only through the internet using an evolved e-ticket system. By setting up such a system for distribution, Air Deccan saved about 20% of the distribution costs. It also used a pay and fly method of selling tickets. The low airline fares ensured that Air Deccan gained competitive advantage. Air Deccan was able to sustain its competitive advantage by adopting various other strategies to ensure high revenue generation. Firstly, it utilized the aircraft to its maximum. By increasing the number of seats and reducing the turn around time it made maximum use of the aircraft. Secondly, it adopted a dynamic costing system. This implied that those seats booked in advance had a lower fare and seats that were booked closer to the date of flying cost more. Furthermore, it generated additional revenues by including credit card fees, sale of food and beverages in flights and the sale of advertising space on seats, storage bins, headrests, tray tables, baggage tags, boarding passes, body of aircrafts, websites and in-flight magazines. It also imposed a fine in case of cancellations and penalties varied between 10 and 100% depending upon the time of cancellation. Lastly, it made use of effective marketing and promotion strategies to highlight the competitive advantage it had through low-cost flying to sustain the same. Challenges in Sustaining Competitive Advantage Firstly, India still has a regulated environment, where fixed costs like fuel and airport related costs are all under government control. Secondly, being a domestic carrier, Air Deccan has to pay higher fuel prices when compared to international flights. Thirdly, domestic airlines in India have to follow routine dispersal guidelines set by government and may have to operate many flights to unprofitable destinations. Fourthly, domestic airlines do not have the option of operating from secondary airports in India and this automatically implies higher parking and landing fees. Furthermore, the Indian aviation industry suffers from inadequate infrastructure such as airport facilities, take off an landing slots etc., and this poses another challenge in sustaining competitive advantage. Lastly, the competition it faces from other low-cost airlines threatens its competitive advantage and Air Deccan must devise strategies to defend and maintain its market share. Barriers to Entry The regulated environment of the Indian aviation industry is the biggest barrier to entry into this industry. The control of fuel costs, airport related costs etc., by the government is also another barrier. Route dispersal guidelines make it impossible for airlines that are new entrants into the industry to establish themselves and make profit. Lastly, inadequate infrastructure such as airport facilities, take off and landing slots, parking bays etc,. make it impossible for new entrants to enter and gain successful market share as well as considerable profit. From the above analysis it can be said that Air Deccan has achieved economies of scale. “Economies of scale are factors that cause the average cost of producing something to fall as the volume of its output increases.” (The Economist, 2008). More specifically, it can be said that Air Deccan has achieved internal economy of scale, as it has increased cost savings regardless of the industry or environment it operates. Air Deccan has achieved economies of scale, by increasing the number of seats in its aircrafts, stopping supply of flight meals and reducing fares. Economies of scale enable large companies to access larger markets by allowing them to operate with greater geographical reach. Thus despite the different barriers to entry, Air Deccan has entered into the aviation industry, created competitive advantage for itself and sustained that advantage. Virgin Atlantic Virgin Atlantic was established in 1984 by Richard Branson and has grown to enormous levels. It now approximately carries five million passengers to 26 long haul destinations out of Heathrow, Gatwick and Manchester. It has grown to become Britain’s second largest airline and connects several major cities of the world. It operates with 36 aircrafts and more than 9000 employees (Yarnall, 2007). Virgin Atlantic has pioneered a wide array of innovations and has been responsible in setting standards in the industry and this has been the key factor that has helped Virgin Atlantic create and sustain competitive advantage. The brand image for Virgin Atlantic is that of a brand known internationally for its innovation, quality and a sense of fun. Virgin Atlantic has achieved this through a strategy known as Value Innovation. Many organizations are using innovation to drive growth and value-driven innovation is considered as the key to sustaining competitive advantage (Innovaro, 2006). Value-innovation addresses customer problems which may lead to customized solutions. It is the application of resources in a customized way to create best possible value for customers. Companies using value innovation assume that industry conditions can be shaped as opposed to merely accepting given conditions. For value innovation competition is not considered as a benchmark; on the other hand, a company must follow a strategy that enables them to make a quantum leap in value in order to dominate the market position. A value innovator targets mass market and is generally willing to let some customers go. It focuses mainly on what customers in the industry value. Value innovation implies that a company must not be held back by what it already has. On the contrary, it must keep exploring opportunities and new avenues by asking itself what it would do if it were to start afresh. The most important aspect in value innovation is to think in terms of what the customers needs and the total solution they seek from a product or service offering. Value innovators most often focus on this even if takes the company beyond the traditional offerings generally given in the industry (Kim & Mauborgne, 1997). Virgin Atlantic is a perfect example of a company who has created and sustained competitive advantage through value innovation. Virgin Atlantic was the first airlines to introduce Upper Class on services at business class fares on its long haul journeys. The upgraded upper class at business class fares along with efficient cabin service was equivalent to tee upper classes of other airlines (Doganis, 2002). This Upper Class Suite product was accompanied by reclining leather seat for take off, a place to sit and eat meals with a partner, a fully flat bed, private on-board bar, a private massage room and limousines for pick up and drop. By charging the same fare as the business class of other airlines for this Upper Class product, Virgin Atlantic succeeded in attracting former Concorde passengers, British Airways passengers and passengers of the business class from other airlines. Apart from this Virgin also targeted premium economy passengers traveling for business or leisure and economy passengers traveling mainly for leisure. The Premium economy class introduced by Virgin targeted the cost conscious customers. It provided extra space, complimentary champagne and a fully flexible ticket. Apart from this Virgin Atlantic introduced its first arrival lounge called Revivals in Heathrow airport. This lounge was designed to provide all that a customer needs to awaken and revitalize after a long flight and get refreshed for the day. Virgin also provides superior in-flight entertainment to its passengers. Virgin’s economy class was the first of its kind to offer a seat-back TV screen to every passenger. Virgin’s in-flight entertainment has up to 300 hours of video and audio on demand as well as a wide selection of computer games. It also provides a K-ids Pack to children on board which has many useful as well as unusual items (Brand Republic, 2005). The airline also provides in-seat power to help passengers run and use their different gadgets. Lastly, it also has Clubhouses for its Upper Class passengers at many of its destinations. Virgin Atlantic has sustained competitive advantage by providing customers innovative flying experiences. Virgin’s Upper Class has attracted not only new customer but has also encouraged a higher frequency rate among existing customers (Kapferer, 2004). It has retained its profitability due to a rise in business travel bookings and a rise in the premium passengers by 20%, due to its unique product offering (Neligan, 2008). It has also gained loyalty of customers by introducing innovative perks to frequent flyers and thus ensuring high revenue generation. By using an optimal mixture of investment on research and development, unique designs and the ability to anticipate customer needs, it has become the market leader, especially for upper class air travel and sustained its competitive advantage (Strauss, 2009). One similarity that exists between Virgin Atlantic and Air Deccan is that both use technology effectively. Virgin Atlantic has been using Aspect solutions since 1994 for its contact centre needs. Due to its massive growth, and in order to address the high costs of network operations, Virgin Atlantic decided to shift to a Voice over Internet Protocol (VoIP) infrastructure and to upgrade its contact centers to manage its extensive growth (Aspect Software, 2009). Hence through continuous innovations, unique solutions for customer needs, effective use of technology and proper leadership, Virgin Atlantic has been able to sustain its competitive advantage. Challenges to Sustaining Competitive Advantage There are two main challenges faced by Virgin Atlantic. Firstly, Virgin Atlantic has to ensure continuous innovation in its product/service offering. This is because innovation can sustain competitive advantage only as long as competitors do not adopt the same innovation in their offering. When everyone in the industry incorporates a particular aspect in their product offering it ceases to be an innovation of one company. Hence constant innovation is the biggest challenge to sustaining competitive advantage. Second, is the level of competition it faces from British Airways, who already have a wide customer base and reasonable market share. From the above analysis, it can be said that Virgin Atlantic has achieved cost minimization, by eliminating first class airline service and channeling a portion of the cost savings incurred into creating greater value for business class customers. This elimination of first class brought about significant cost minimization and cost savings. This is because the overheads of first will be removed along with its elimination and Virgin will still retain a portion of these overheads after utilization for creating value to business class. Along with cost minimization this action has brought about an increase in the number of customers as the value creation to business class attracted not only business class customers but also economy and first class passengers from other airlines. Thus the major difference between Air Deccan and Virgin Atlantic is the use of two varying strategies for creating and sustaining competitive advantage, with Air Deccan using the low cost business model and Virgin using the value innovation business model. The similarity between them is the effective use of technology. Both have succeeded enormously, in creating and sustaining considerable competitive advantage. References Kim, W C & Mauborgne, R (1997). Value Innovation: The Strategic Logic of High Growth. Harvard Business Review. Innovaro (2006). Innovation Briefing. Innovaro Limited. Retrieved September 17, 2009. http://www.innovaro.com/inno_updates/Innovation%20Briefing%2006-06.pdf Brand Republic (2005). Superbrands Case Study: Virgin Atlantic. Brand Republic Website. Retrieved September 17, 2009. http://www.brandrepublic.com/InDepth/Analysis/478736/Superbrands-case-studies-Virgin-Atlantic/ Aspect Software Inc (2009). Case Study: Virgin Atlantic. Aspect Website. Retrieved September 17, 2009. www.aspect.com/casestudies/Aspect_Virgin-Atlantic_CustSvc_CS.pdf Aspect Software Inc (2009). Case Study: Air Deccan. Aspect Website. Retrieved September 17, 2009. http://www.aspect.com/casestudies/Aspect_AirDeccan_CS_A4.pdf The Economist (2008). Economies of Scale and Scope. The Economist Website. Retrieved September 17, 2009. http://www.economist.com/businessfinance/management/displaystory.cfm?story_id=12446567 Doganis, R (2002). 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