Strategy and Competition of Swissair - Essay Example

Strategy and Competition of Swissair Problem Definition The essential problem for Swissair comes across as an issue of corporate mismanagement, a lack of governance for the company and the overly optimistic outlook which the managers had. The problem of liquidity which caused Swissair to halt operations resulted from a variety of factors but all of those factors were connected with how Swissair was managed. The plans which were made to bring Swissair to the top of the pile, when it came to being a competitive airline, were flawed and essentially led to the downfall of the company. Justification for Problem Definition The justification for assigning the situation of Swissair to issues connected with mismanagement, corporate governance and lack of planning comes from the case study itself which shows that the plans made for Swissair were flawed. The rapid expansion which was supposed to bring Swissair out of its financial worries only served to make the situation worse eventually leading to liquidity problems for the company. Further, the manner in which Swissair spent money and made investments clearly shows that the management often had other interests in mind rather than the best interests of the company. SWOT Analysis The SWOT Analysis of the company shows that while the strengths of the business were exploited, the weaknesses and were not accounted for and those weaknesses eventually led to the threats to the company becoming realities. The SWOT analysis created with the information presented in the case study shows the elements as follows. Porters 5 Forces Porter’s 5 Forces shows an interesting picture for the airline industry and it is clear that it is not easy to be a new entrant into a market which is dominated by heavy competition and rising costs. Profit margins for many airlines are becoming thinner as fuel costs and taxes are increased internationally which means the only determinant of new entrants is how easy or difficult it is for them to secure significant lines of capital. Even with price competition, an airline which has a strong brand name might be able to charge a premium for the same services as other airlines. Getting that brand name however, requires continued service quality and a long history of excellence. The power of suppliers is also quite high since Boeing and Airbus dominate the supply side while the power of the buyers is quite low with regard to them simply needing planes if they are to call themselves as an airline. The threat of substitutes becomes low when we consider international travel but it remains quite high when local and regional travel is considered. Taking a two hour train might be preferable to a half hour flight if the cost of the flight is four times or more than the cost of the train ticket. Finally, competitive rivalry is certainly quite high as airlines compete with each other on several different points to get passengers to come to them. Alternative Courses From the direction taken by the company, there could have been several different alternatives which might have led it to greater success of which three can be discussed in detail. Alternative 1: A Conservative Approach The first possible course of action for Swissair would have been to avoid the ambitious expansion plan undertaken by the company for a more conservative approach which could have allowed the organization to improve its liquidity situation before any rapid investments should be made towards increasing the size of the organization. Alternative 2: External Consultants The second course of action which could be a recommendation would be to obtain the services of management personnel who have more experience in dealing with international airlines of the Swissair size. Those individuals who previously had brought airlines from loss to profitability could even be recruited as consultants to show Swissair where it had gone wrong and then their recommendations could be used to prop the company back on its feet. Of course, the financial advice given by PriceWaterhouseCoopers should have been given more thought than to simply be ignored. Alternative 3: Management Scrutiny The third course of action which Swissair could have considered while it was trying to survive would be to make sure that there were no conflicts of interests between the management and the objectives of the company. Such conflicts certainly led to problems not only in financial terms about also in legal terms once the company faced bankruptcy through financial liquidity issues. If nothing else, some new lines of credit could have sustained the company while it tried to get back on its feet but the conflicts of interest and their discovery would have not improved the confidence which people in general and the investors in particular had with the organization. Evaluating the Alternatives When the alternatives are evaluated with regard to their effectiveness, it seems that the second alternative is the best one since it gives the company and outsiders’ perspective onto their business practices. It is clear that that airline was unable to see where it was going since the management had turned a blind eye to many of the problems the company was experiencing. Mismanagement, corporate governance and even financial holes were being glossed over since there was no one to blow the whistle. The first course of action can be considered a common sense action since the company was facing financial issues and was uncertain about the future with regard to how it would secure the money needed to remain operational. Making heavy investments and acquiring stakes in other organizations is certainly a possible course of action since it could generate new sources of funding and thus get the money it needs. However, it is also a very risky course of action and those risks must be evaluated carefully before investments are made. In Swissair’s case, it seems the evaluations were flawed and the risks too great. Had there been external observers, consultants and those who were supposed to look at what was going wrong with the company; it is entirely possible that they would have and could have let the company know that it needed to change its actions. Such consultants would have certainly objected to the conflicts of interest the company had within the team managing the company and would have also objected to the agenda of rapid expansion at the time when the company was facing liquidity issues. Pros and Cons of Alternatives Alternative Pros Cons Evaluation Alternative 1: Conservative Approach Reduced Capital Expenditure Financial Stability Improved balance sheet situation Reduced expansion opportunities Less chances of financial gain Missed opportunities Possible alternative but comes with heavy cons Alternative 2: External Consultants Increased chances of catching management oversights Consultant experience could compliment management skills Positive advice Expense of recruiting consultants Best option since it gives the most benefits at the least cost Alternative 3: Management Scrutiny Slightly improved chances of catching oversights No real external costs Could catch conflicts of interest Management may ignore internal issues Time investment Possible alternative but the benefits are minimal at best Conclusions and Recommendations Undoubtedly, there is a cost associated with recruiting consultants and making sure that the best possible people are there to give advice to the company but the cost of the recruitment would have been far lower than the five year advance salary paid out to the CEO. Any good financial or management consultant could have suggested that this was a bad idea and could have political as well as managerial implications but it seems that the board did not think about the impact their decisions could have on the future of the company. Additionally, it becomes clear that there is a time for rapid expansion, business development and acquisition of various companies but that requires the company to have sustained lines of credit and a cash flow which can support such behavior. Without these requirements, expansion is a very risky process and should be avoided if possible. It seems that Swissair was taken on an adventure by the board of directors and the top management of the company without any regard to the developing situation that called for caution and careful spending. Spending money while the company had nothing to fall back on and allowing managers to make rash decisions without any concern for the future needs of the company played a large role in bringing the company down. In essence, Swissair needed guidance which was not coming from within and thus needed to come from someone who was outside the company. Had that been there for Swissair, the problems such as bankruptcy and the loss of repute might never have happened in the first place. For other companies which face the same problems as Swissair, the aid of external consultants and unbiased advisors is easy to recommend. Follow-up and Evaluation In the final analysis, it is clear that there was a combination of factors which led to the eventual collapse of Swissair and many of the problems which plagued Swissair could have been easily handled had the directors of the company and the senior management been more careful with what they were doing. The case of Swissair goes to show that warning signs should never be ignored since small problems can often balloon to a point where they become critical issues and even lead to the failure of the company. An unbiased outsider’s perspective can be quite helpful in spotting such issues when a company cannot figure out where it is going wrong and what it can do to handle the problems within the company. Works Cited IMD. 2002. The Grounding. IMD Read More