JetBlue Using Porters Five Forces - Case Study Example

One tool that can be used by JetBlue in making informed and accurate decisions is the Porter’s Five Forces. The forces were identified with the main aim of analysing industries and their competitors (Brandenburger, 2002). Beyond analyzing the industry, the forces help in determining the potential strategies that a firm can use (Riwo-Abudho, Njanja & Ochieng 2013).The forces include threat of new entrants, suppliers’ bargaining power, buyers’ bargaining power, threats of substitutes and competition or competitive rivalry that exists within the industry. An analysis of JetBlue Airline using these forces reveals the following; Threat of New Entrants Based on what can be learned about JetBlue’s start up and move to success, the threat of new entrants is low. Unlike other industries, the airline industry is characterized with high start-up and high running costs, which acts as a barrier to entry. So much is the costs that airlines that make it in the industry either must have been started a bit earlier in order to make it up the competitor ladder in a gradual manner. In addition, so much is the cost that small airlines must be affiliated with large airlines in order to make it in the industry. In order to confirm that the threat of new entrants is minimal, a look at JetBlue shows that success within the industry was not obtained overnight. Instead, the company has gradually moved towards success. The case study also shows that some attempts by some airlines to make it in the same market with Jeblue was not simple. For example, US Airways was one of the five US Airlines that filed bankruptcy in 2006 owing to the drop in revenues and increased costs. Suppliers’ Bargaining Power The company does not have many suppliers. Only two of them are identifiable. Essentially, this means that the supplier’s bargaining power is high as the company does not have many suppliers to choose from. Apart from airline suppliers, other suppliers include fuel suppliers and the current price of fuel in the industry is high. This again makes the bargaining power of suppliers to be high. Since the airline has prescheduled flights, fuel supply is quite important as it cannot afford to miss any airline. This still confirms that the suppliers’ bargaining power is high and any of their actions can lead to serious consequences on the industry’s part such as low efficiency, which is highly related to fuel supply and cost. Buyers’ Bargaining Power Customers within the airline have several airline options to choose from. Therefore, their bargaining power is high since the company must maintain a high quality level coupled with low prices in order to win its customers’ over from its competitors. The fact that the services offered in relation to those of other companies are standard still keeps the customers’ bargaining power higher than usual. A good example of the high customer bargaining power is seen after the 2007 crisis. The company knew that its customers were the most important despite the bad reputation associated with the crisis. Therefore, a Customer’s Bill of Rights was developed in order to make sure that the company’s responsibilities to its customers were clearly marked out. Threats of Substitutes The fact that numerous airlines, some of which are funded by larger airlines make substitutes threats in this industry to be high. Other cheaper transport means also exists, which only works to increase the threats of substitutes. For example, the low cost carriers such as JetBlue and Southwest Airlines started taking passengers between cities in order to attract passengers who traveled by bus or by car. Since this mode transport was less costly, Southwest Airline, which led the way, had to keep its fares at low prices through discounts. The same threat still exists, which is one of the reasons why JetBlue’s fare prices has to be kept low apart from reasons related to competition. Competitive Rivalry A closer look at the industry as outlined in the presented case shows that competitive rivalry is high. Competitors are either LCC competitors or legacy carriers. The latter are have a long history in the airline industry as some started operating as back as in the 1920’s. For example, one of the airlines in this category is Delta airlines, whose operations started in 1955. LCC competitor’s, on the other hand, are those competitors that operate in shorter distances and take customers from one point to the other. The major competitor under this category is Southwest Airline since the company’s operating revenues is higher than that of JetBlue. For example, the 2005 financial and operational results for all the Airlines showed Southwest’s Operating Revenues to be at $7,584 while that of JetBlue was at $1,701. The same case applies to the Net Income as Southwest’s Net Income was at 548 while that of JetBlue was at (20) meaning that the company was operating at a loss. Southwest’s number if passengers and number of fleets were also higher than those of JetBlue during the 2005 report. Southwest Airlines had 77, 693 passengers while JetBlue only had 14,729 passengers. Southwest Airline’s fleet was 445 while those if JetBlue was at 92. JetBlue’s Business Strategies JetBlue’s business strategies can best be identified and explained using Porter’s generic strategies, which include cost leadership, differentiation and focus (Kim, Nam & Stimpert 2004). Cost Leadership Cost leadership according to Porters means having the lowest average cost in the given industry/ It could also mean having low costs relative the company’s few rivals. Based on the 2005 financial report on different airlines, JetBlue’s costs are lower than those of Southwest Airline. This is because the company has an operating expense of $1,653 while its competitor has an operating expense of $6,764. In fact, JetBlue’s operating expenses are the smallest among all the listed airlines that include both legacy carriers and low cost carriers. Apart from the operating expenses, JetBlue acts as a cost leader in the area of reservation because it has a website that allows customers to reserve and purchase air tickers. The company’s cooperation with reservation agents who work on part time basis also helps JetBlue in running its reservations at lower costs when compared with the other airlines. One reason why cost leadership is a competitive strategy for JetBlue is because it can be used by the company to defend itself from powerful suppliers. In addition, it can be used by the company to defend itself from powerful buyers since as noted earlier, both supplier and buyers’ power is high. Cost leadership also acts against new entrants since it creates entry barriers, which is very low according to an earlier discussion on the same. Differentiation Differentiation refers to the creation of something that is unique in respect to competitors within the same industry. Differentiation creates brand loyalty and shields a company from competitive rivalry. Differentiation also reduces substitutes and creates barriers. Among the LCC, JetBlue differentiates its services from those of others by having comfort features such as satellite TV, leather upholstery and assigned seat for every seat. The company also differentiates its services by stressing on minimal flight cancellations and flight completion. The company also offered longer haul flights and numerous flights than other low cost carriers. Focus Focus strategy involves focusing on a certain product, market or buyer group. JetBlue’s focus strategy is mainly seen in the company’s focus on a certain product; A320. The company has stuck to these airplanes until a recent strategy to change the airplane types came. Through this strategy, the company is able to work at lower risks, which gives it further ability to defeat competitors and earn high profits. In fact, the focus strategy has been one of the main tools as used in outdoing the airline’s competitors as it attracts many customers. JetBlue’s Key Value Drivers The Human Resource The company’s human resource can be termed as one of its key drivers owing to its ability in maximizing efficiency. For example, the part time workers at the company’s website have been cited as important key value drivers as they help in minimizing costs. Assets Another important key driver is the company’s assets, which include the A320 and the new airplanes. Based on the presented case, the named assets help in maximizing efficiency and helps in attracting and retaining customer, which is then translated into revenues. This is partly because of the inside models of these aircrafts, which allows maximum consumer satisfaction. VRIO Framework and the JetBlue’s Resources VRIO, according to Nuno & Nelson (2012) stands for an organization’s valuable, rare, inimitable resources that are organized in order to capture value (Nuno & Nelson, 2012). Valuable The company’s value is created using differentiation, a strategy that is hard to imitate by other airline companies. The company’s booking website is one of its kinds since it operates during the day and during the night. To facilitate this ability the company has some part time workers who work from their homes. Rare JetBlue’s strategies are rare within the LCC industry. For example, the company’s strategy of not cancelling flights is rare. In fact, after a Customer’s Bill of Rights was created to enforce this strategy, it was named as one of its kind. The company’s differentiation strategy (which is captured by Exhibit 6a), which ensures high customer comfort, is also rare among the LCC. Inimitable (Costly to Imitate) The company operates as a LCC carrier, which is not easily imitable. This is seen in the low number of LCC in the industry since the only discussed LCC include JetBlue and Southwestern Airline. Other airlines that want to operate as LCC have to merge with legacy airlines in order to do so. In addition, airlines that tries to imitate LCC like Southwestern airlines ends up failing terribly. Organization The resources explained under the other parts of the framework must be well organized in order to capture value. Only with proper organization of valuable, rare and inimitable resources can an organization achieve a sustainable competitive advantage. A look at JetBlue organization shows that it is not capable of fulfilling the potential of its resources. However, the company has the potential of having a sustained competitive advantage using the resources discussed in the VRIO framework if its current organization of the resources available would be upgraded. For example, the company has to make sure that its strategy of non cancellation of flights is maintained at whatever cost in order to keep upholding the company’s good name. The 2007 Crisis In 2007, the company suffered loss and also suffered from a bad reputation after many of its flights were cancelled owing to the bad weather and the lack of proper coordination. In order to avoid similar crises, the company decided to sell some of its aircrafts and to keep others. This would help in subsiding growth, which heightened the 2007 crisis. In addition to minimizing its growth level, the company also changed its management hoping that the new management would help the company in maintaining efficiency. A look at the company’s change of management shows that it is not justifiable. The company’s CEO had been classified among the top CEO in terms of performance by the Business Week Magazine. This means that the problem might have been as a result of other issues and not the management. Another reason why the management should not be changed is related to the company’s growth under the past management. The company had survived the Septmeber11 crisis despite the challenges and the declaration of bankruptcy by some airline companies. Since the 2007 challenge is not as huge as the September 11 crisis, the companies past CEO could have handled this crisis. Apart from surviving worse crises, Exhibit 3, which presents the company’s growth in terms of profitability shows the company’s continued growth. The company’s operating revenues in 2003 was at $998 million. This increased annually to $2, 363 in 2006. The company’s flight also increased in the same period since there was 66, 920 flights in 2003 and 159, 152 flights in 2006. Other growth statistics that supports the good work under the past management include increase in available seats per mile, increase in total assets and increase in investments. During this period, the company was also able to purchase more and more aircrafts meaning that the past management was not sleeping on the job. Instead, the management was doing everything to enhance growth (Huckman & Pisano 2011). References Riwo-Abudho, M., Njanja, L., & Ochieng, I. (2013). Impact Of Organization Characteristics On Sustainable Competitive Advantage During Strategic Change In Airlines. European Journal of Business and Management, vol. 5 Issue 7, pp. 145-156. Brandenburger, A (2002), Porter's added value: High indeed!. The Academy of Management Executive, vol. 16 Issue, 2, pp. 58-60. Gopinath, C & Siciliani, JI (2014), Strategize!: Experiential Exercise Strategic Management, 4th edn, Mason, OH, South Western Cengage Learning pp. 153-165. Banker, R , & Johnston, HH (1993), An empirical study of cost drivers in the US airline industry,  Accounting Review, pp. 576-601. Nuno, C, & Nelson, A (2012), ‘Valuable, rare, inimitable resources and organization (VRIO) resources or valuable, rare, inimitable resources (VRI) capabilities: What leads to competitive advantage?’African Journal of Business Management, vol. 6, Issue 37, pp.10159-10170. Huckman, RS, Pisano, GP (2011), JetBlue Airways: Managing Growth [Class Handout] Kim, E., Nam, DI & Stimpert, J L (2004), ‘The applicability of Porter’s generic strategies in the digital age: Assumptions, conjectures, and suggestions’ Journal of Management, vol. 30, Issue 5 pp. 569-589. Read More