International Strategic Management - Assignment Example

International Strategic Management of the Contents Contents 2 4 Introduction 4 Etihad Airways: Brief Overview 4 Analysis of the environment and industry 5 Macro environment 5 Industry Environment 6 Market Environment 7 Analysis of the choices of Etihad Airways 8 Analysis and evaluation 8 Business Strategies 8 Corporate Level Strategy 9 Fitness of strategies 9 Company’s performance during the Recession 11 Alternative Strategies 11 Objective evidence of the company’s performance and strategic outcomes 12 Strategic Outcomes and their causes 12 Strategic Success and long-term implication 14 Conclusion 14 Introduction Strategic management involves development and implementation of the major strategic initiatives taken by a company’s management on behalf of the owners, on the basis of available resources and in-depth evaluation of the company’s external and internal environment where the company functions (Zaremba, 2003). In simple terms, strategic management is responsible for providing an overall direction to the firm by involving or taking into consideration the specific organizational objectives, plans and policies. In addition, strategic management also involves allocation of resources and implementation of plans (Usunier & Lee, 2001; Wood, 1999; Zakarevičius, 2002). According to Wellman (1997), strategic management is an important function of business houses because this assists organizations to set long-term and detailed goals as well as analyse the internal and external environment where a firm operates (with tools and frameworks such as, PESTEL analysis and Porter’s Five Forces analysis). Furthermore, scholars have also identified that in order to ensure good corporate governance; a company needs to ensure efficient strategic management (Hamel & Prahalad, 1994). This study seeks to investigate about the strategic management of Etihad Airways, since the Great Depression of 2007. Studies have shown that there have hardly been any companies that could escape from consequences of the recession and aviation is regarded as one of the worst affected sectors. As a result, choosing Ethihad to evaluate their strategic management approach is justified. Therefore, before proceeding further, the study throws light on a brief description of the company. Etihad Airways: Brief Overview Etihad Airways is an airline company based in United Arab Emirates. The company is one of the flag carrier airlines of the United Arab Emirates. The company was established in the year 2003 and since then, growth has been synonymous with the company. The company is presently headquartered at Khalifa City A, Abu Dhabi with its base at the Abu Dhabi International Airport. The company operates with more than 1000 fleets per week and provides services to nearly 96 destinations around the world, including Middle East, Africa, Europe, Asia, Australia and the Americas. Apart from the core activity of providing passenger transportation services, the company is also active in fields of goods transportation and travel and tourism industry. Hamed bin Zayed Al Nahyan and James Hogan serve as the Chairman and CEO to the firm, respectively (TTN, 2014). In the year 2013, the company acquired 33.3% stake of Swiss carrier, Darwin Airline, which was rebranded as Etihad Regional from March 2014. The company had earned staggering revenue of US$ 6.1 billion in the financial year 2012-2013 (TTN, 2014). Analysis of the environment and industry Two types of environment that influences performance of an organization are industry or competitive environment. The industry level analysis is best described through Porter’s five forces and the PESTLE framework is used for analysing the macro environment of a firm (Bouwman, Vos, & Haaker, 2008). Macro environment Political: The political environment in the U.A.E. is quite stable and can foster development of the Etihad Airways. The government has undertaken policies to expand major airlines, which has been evident in the billion dollar investment of the government to meet growing demands of the Etihad Airways. Since 2007, the governments in other countries are restraining the capacity of airlines; but, U.A.E. has been promoting airline networks to facilitate growth (Boxall & Purcell, 2008). Economic: The economic growth of the country is mainly driven by performance of the oil sector. The global economic downturn had slowed growth rates of the economy; but, presently, the recovery is on track. The Etihad Airways have continued to show robust performance in profitability and the company had reported 24.5% growth in passengers’ revenue, which was higher than the industry average (ADEV, 2012). Social: The overall population of the country is rising, which represents improved opportunity for the entire business community. The overall standard of living in the society is high, involving frequent air travel. Technological: The Abu Dhabi government is strongly committed towards creating a knowledge based economy for achieving long-term goals of sustainability of the country. The country has been consistently trying to emphasise on human capital development. Other key areas of importance include growth of the private sector, research and development and improvement of overall infrastructure of the country (ADEV, 2012). Legal: The legal policies of the country had come under attack ever since the global financial crisis due to rising number of lawsuits scandals. In order to control this damage, the government has come up with a new provision in the Corporate Governance Law in 2010; this aimed to restore trust of investors and public (Kampfner, 2010). Environmental: The ecological footprint of the country is very high, which is making the government take proactive measures for improving environmental standards regarding energy, waste and water. This can have notable impact on the airline companies in terms of lowering carbon footprint. Industry Environment The industry environment is analysed through the Porter’s five forces: Threat of rivalry: In terms of market share, biggest rivals of the company include Emirates Airlines, Fly Dubai and Air Arabia. As these companies are increasing their fleets consistently, competition is becoming fiercer (IATA, 2011). Threat of new substitutes: At present, Jet Airways and Oman air are acting as a threat for the company. There has been a tendency among the large companies in the airline industry to reduce their fares ever since the global financial recession. The fall in the disposable income of commoners have made them opt for low cost airlines (India Today, 2013). Threat from new entrants: With relatively higher economic growth of the Gulf countries and those in Asia (particularly, India and China), threat of new entrants is quite high for the airline industry. The threat of new entrants remains high, despite low profitability of the airline business. New entry mainly occurs when existing airlines enter in new markets and barriers to entry are low for this industry (IATA, 2011). Threat of consumers: Initially, this threat was low; however, with rising prominence of online ticket purchase, this power has strengthened as customers can compare prices of the tickets, prior to making the purchase. Loyalty among customers is low and they are price-sensitive. Threat from suppliers: The bargaining power of suppliers is high due to their control over the critical inputs. Over few years, there has been a rise in cost of fuels and a fall in that of distribution. Boeing and Airbus are the two suppliers in this regard (GAO, 2001). Market Environment Market Segments: Aviation industry generally follows customer segmentation process to divide customers as business and leisure passengers. Market segmentation is extremely important for the aviation industry for recovering the costs of their operation (Airberlin, 2012). Etihad Airways not only has low cost flights aimed for the mass market, but also segments its upper-end market as Pearl Business Class and Diamond First Class. The company provides staff-provision and multi-cuisine arrangement on board in order to attain competitive advantage over rivals. Strategic Groups: The rationale behind forming strategic partnerships for companies is that they work with the pursuit of achieving a common mutually beneficial goal (Hitt, Black & Poretr, 2005). The company has formed strategic partnerships with Airberlin in 2012. This was done to improve the reach of the company in new markets as well as form a global network of connected routes. Both of these airlines have merged their resources and expertise so as to strengthen their positions. The partnership of the company with the Air France-KLM Group was also formed to enhance performance in the highly competitive industry. Analysis of the choices of Etihad Airways From the existing analysis of the macro-environment, industry and the market factors, it can be concluded that the company has been quite successful in the decisions it has taken. This is prominent from the robust financial performance of the company and its increasing strategic alliances with other Airline companies for entering new markets. The financial report 2012 stated that revenue of the company had risen by 17% from that of the previous year. The company has also been trying to lower its carbon emission and has already reduced 24% of the emissions per kilometre, since 2006 (Etihad Airways, 2014). This implies that the organization is keeping up with the stringent environmental policies of the government and will become sustainable in the long run. Finally, the company has been trying to improve its technological aspect through development of the IT department. Analysis and evaluation Business Strategies Business level strategies refer to the way in which a business positions itself in the market in order to achieve competitive advantage over its rivals (Pinnington, n.d.). It also includes the positioning strategies, which are specific to various industries like, cost leadership, product differentiation and niche segmenting of the market (Hill, Jones & Schilling, 2014). Etihad has used the target marketing strategy as one of the primary strategies. The company has a wide range of product offering for the customers that ranges from top class benefits of first-class travel to comfortable economic class travel. The company has closely studied the profile and needs of the customers to understand the kind of services that are expected from them and has developed its products accordingly. The company also offers chauffer service not only in Abu Dhabi, but in all regions in which it operates; this provides the airlines with a competitive edge. The winning of three awards at Skytrax awards for Airline excellence in 2013 like, Best Catering (First Class), Best First Class (fourth consecutive year) and Best First Class Seats, bears testimony to its competitive advantage (TTN, 2014). Corporate Level Strategy Formulating the corporate level strategy can involve three main management decisions by the managers, namely type of the industry and business of focus, creation of value in the activities of operation and way in which the firm should enter, consolidate and exit from the industry (Hill & Jones, 2012). The corporate strategy of Etihad can be described as a vertical complementary business alliance. In this type of an alliance, firms share their capabilities and financial resources in a complementary way in order to improve competitive advantage of both the organizations. The recent investment made by the company in Airberlin and Air France-KLM Group reveals the desire of the company to penetrate new geographies successfully. The company has recently increased its Codeshare partners to include the national carrier of Serbia and has already announced to enter into partnerships with Air Canada and South African Airways (Airberlin, 2012). Fitness of strategies The following chart presents the strategic management model that a firm needs to consider for its strategic planning. Figure 1: Strategic Management Model (Source: Armstrong, 2011) The internal environment of the business represents factors that can be controlled by the business and external factors represent the circumstances that are beyond the control of the business (M. Trehan & R. Trehan, 2007). In simple language, external environment refers to the general and competitive environment faced in the industry; whereas, the internal environment relates to tactics applied by the business to overcome these difficulties. The external environment presents the challenge of competitiveness for the organization and it faces very tough competition from the Emirates Airlines. In order to emerge as one of the strongest Airlines globally, the organization is now aggressively forming strategic alliances with a number of other airlines for dominating the world market. The company has introduced notable changes since 2008 so as to restructure its corporate governance, thereby being able to effectively compete in the world markets. Few of the tactics that has been implemented are setting up of the architecture review and design board and improvement in the service management. The strategies taken by the company has been quite successful in raising profitability of the business and enhancing competitiveness. The company has been trying constantly to improve its quality of service along with the aviation fleet. This implies that pollution generated by the airlines will reduce progressively over the years and this will add to profitability. Company’s performance during the Recession Since the year 2007, the company has continued to experience growth. Reports have suggested that for consecutive 5-6 years, Etihad has managed to upkeep 8-10% profit per year (TTN, 2014). The overall turnover has also increased when compared with the previous year’s turnover. The number of passengers that have been catered to has also increased significantly. Likewise, the number of carriers and employees kept rising from 2007 (Pang, 2009). Hence, it is obvious that the impact of recession was comparatively low for this company. This also suggests that the strategies adopted by the firm in this part were appropriate and have been implemented and managed in an effective manner. Numerous reports have indicated that the company has been successful enough to forecast the market situation and had devised strategies accordingly. This allowed them to mitigate the risks of the market and function efficiently. The major emphasis of the company was on market research activities and industry analysis. Alternative Strategies This section intends to discuss about policies that had been taken by Etihad Airways to consolidate its position. One of the repercussions of the alliance with Air Berlin is that it can drag Etihad into its own financial crisis (European Parliament, 2009). Moreover, the percentage of stake of Etihad in Air Berlin does not provide the company with controlling share of the latter. An alternative strategy in this regard would have been to acquire the controlling share in Air Berlin as the partnership is more beneficial to the latter. Since the global financial crisis, economies of the western countries, including U.S.A and Europe, had been severely impacted. The countries of the emerging countries, on the contrary, had been resilient to the crisis relatively. Therefore, the airline could have looked for an opportunity to enter into a strategic alliance with successful Indian and Chinese companies to capture markets of these emerging countries. According to recent reports, the company has entered into alliances with Jet Airways and even plans to enter China through alliance. The company has also largely overlooked investments in Middle Eastern airlines and has shown interest in airlines of the West (Menon, 2012). Objective evidence of the company’s performance and strategic outcomes Presentation This section of the report focuses on performance indicators of Etihad Airways, which have been crucial for success of the company. The time period of 2007-2009 represents one of the worst financial times in world economy as this was marked by failure of a large number of multinationals and even certain airline companies had found it difficult to sustain the pressure (Sezgin & Kozak, 2012). Some were nationalized and others were unable to cope with the situation (Kaplan, & Norton, 2001). Under such difficult times, performance of Etihad Airways was quite robust, which can be strongly attributed to strategic planning of the company. The key evidences of strong performance are (Gazzer, 2014): Most successful commercial airline in the history of aviation industry Contributed 5.5 billion dollars to the GDP of Emirates in 2010 Made a profit of $42 million dollars Provided 56 million new jobs in times of rising unemployment Strategic Outcomes and their causes Nortan & Kaplan (2001) had developed a strategic map for the business, which basically has the essence of a cause and effect model, thereby helping managers to relate the critical drivers of performance to the outcomes (Martin & Beaumont, 2003). The following figure depicts the way in which a company can improve value of its strategic outcomes by focusing on various aspects of the management process. Figure 2: Strategy Map (Source: Murby & Gould, 2005) In the last few years, following the global financial crisis, Etihad Airways had carefully weighted its options to build its strength. The Airline has been marked with a proactive strategy to built interline and partnership agreements. The primary cause for this is the organization’s desire to become a dominant player in the aviation industry in U.A.E. The signing of the treaty with the Air Berlin reveals a strong will of the company to be ahead of its Emirate competitors. The commitment of the U.A.E. government to improve ecological footprint of the country may result in policies such as, carbon tax (prominent in the Western countries), in the future; this can create impact on profitability of Etihad. To avoid this unseen change, the company has already taken measures like, green engines and light carbon containers, to render the operations more sustainable (TTN, 2014). Strategic Success and long-term implication The analysis until now has revealed that the company had been quite successful in ventures that had been undertaken till date. The innovative partnerships of the company with most significant airlines of the world have created a long-term sustainability for the company. These partnerships had provided the company with a higher resource base and geographical reach to compete with the rivals. The fuel optimisation and development of successful fuels will provide huge competitive advantage for the company in the forthcoming years. This is because sustainable business development is the only way to remain competitive in the long run (Murby & Gould, 2005). Throughout the period of study, from 2007 to 2013, the organization had made remarkable progress in its performance. The sustainability report published by the company shows that performance is likely to be strong in the coming years as well. The strategies adopted by the company reveals that instead of starting from scratch, the company has relied on existing airlines through one-to-one partnerships in order to pool resources. This has worked wonders for the company. Conclusion This assignment has discussed in details about strategies that had been undertaken by Etihad Airways during the difficult economic phase of global financial crisis that had crippled the world economy severely. This assignment has used various concepts of strategic management to understand business development of Etihad. It has been observed that even during the difficult economic phase, the company had achieved solid growth through strategic alliances with other Airlines, cost efficiency through fuel hedging, cutting down operational cost and promoting development in a sustainable manner. The outcome from following these strategies had resulted in strong financial growth. References ADEV. (2012). The Abu Dhabi economic vision 2030. ADEV. Retrieved from http://www.adced.ae/PDF/EcoVisionReports/Mandate%20and%20Executive%20Summary.pdf Airberlin. (2012). Strategic partnership with Etihad Airways. 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