Management Strategy and Decision Making - Term Paper Example

 «Management Strategy and Decision Making» Table of contents Executive summary……………………………………………………….2 1.0 Introduction……………………………………………………………3 2.0 Background of the organisation………………………………………..3 3.0 Scope of the study………………….………………………………….3 4.0 Organisation’s external environment………………………………….3 4.1 PEST Analysis…….…………………………………………..4 4.2 Porter’s five forces model…………………………………….4 5.0 Organisation’s performance in five year strategic period…………….6 6.0 Recommendations……………………………………………………11 7.0 Conclusion……………………………………………………………11 Executive summary The report seeks to critically analyse Qantas’ internal and external environment and performance using the strategic management theory. In order to analyse the organisation’s internal and external environment, Porter’s five forces model and PEST analysis are employed in the report so as to ascertain the company’s strategic direction as well as justification of why it performed above or below expectations over a five year period. A critical analysis of factors which drive performance at Qantas shows that the organisation has been performing above average during the five year strategic period from 2005 to 2009. However, it has been recommended that Qantas should streamline its operations in order to focus on its core business which includes offering freight and passenger services. 1.0 Introduction In order to critically analyse the strategic management theory, it is imperative to begin by defining the term management. Schultz et al (2005:9) define management as the process of working with and through others to achieve organisational objectives in an ethical and efficient manner. Thus, the strategic management theory is tied to the organisation’s overall performance and is mainly seen as a twofold process where the managers seek to accomplish the task and satisfy the employees at the same time (Gordon 2002 as cited in Schultz et al 2005). Against this background, this study seeks to critically analyse the strategic operations of Qantas over a five period. 2.0 Scope of the study The study is mainly concerned with critically analysing the operations of Qantas with regards to its internal and external environment and the extent it has managed to remain strategically viable over a period of five years. The study seeks to critically examine the success factors of Qantas and how it is implementing its long term strategies in its day to day operations. 3.0 Background to the organisation Qantas is one of the world’s oldest continuously operating airlines. Qantas airways were fully privatised in 1993 and its affiliate companies include Jetstar, Jetconnect, Qantas link and Qantas freight. Other companies that they own shares are Air Pacific, Air Express, Star tack express. Over a period of the last five years, Qantas has underscored to fulfil the following strategic directions: 2005- to purchase new aircrafts, 2006 – expansion of jetstar to Bali, Ho Chi Minh, Osaka and Honolulu, 2007 – Lost bid for Airline Partners Australia, sold their Air New Zealand shares, 2008 – In July they were 58% shareholders of Jetstar Travel holidays and Qantas Business Travel and in 2009 – to maintain a steady share price. 3.0 Organisation’s external environment The structure of the aviation industry is quite complex and a bit challenging for new entrants to survive profitably. It is subject to rapid and unpredictable changes in customers’ preferences as well as price fluctuations in vital resources such as fuel. Thus, the macro environment to the company is also regarded as its external environment. An external analysis of the environment shows that Qantas has been operating for 90 years. The two brand strategies with Qantas airways and Jetstar airlines, helps them respond to the fluctuating demands for customer. Forward thinking strategy- keeps them ahead of all the other airlines as well as being innovative with technology. Frequent flyer points promote customer loyalty and also with their alliance with Woolworths, they have expanded their customer base. For instance, Oneworld alliance SFP Department – focus on cost savings through innovative processes and fuel efficient methods of operations. All these factors positively contribute to the overall performance of the airline. 3.1 PEST Analysis This tries to give an in-depth understanding of the operations of an organisation in relation to the external factors that may affect its operations (Lancaster and Reynolds 1999). Basically, PEST is an acronym which stands for factors which may affect the operations of business such as political, economic, social and technological. For instance, Qantas is affected by government regulations in its operations and it has to comply with them in order to remain true to its vision. Qantas has welcomed the Australian Government’s decision to conduct a review of aviation policy, which presents an opportunity to acknowledge the distortions that exist in the international market and the disadvantages and impediments faced by Qantas as an end-of-line carrier competing against the main hub players. Rising fuel costs as well as decline in the economy are also other factors that affect its operations. Qantas recognises the need to take into consideration different cultural values of people from different backgrounds as a way of ensuring satisfaction among all the clients. New technological developments affect Qantas in various ways and it has embarked on purchasing a new fleet of planes which are efficient and cost saving. 3.2 Porter’s five forces model Another viable method of analysing the environment in which Qantas is operating is Porter’s five forces model. This is often regarded as a reliable business tool since it aims to diagnose the external factors that affect the operations of the organisation such as competition as well as establish its competitiveness. (McCarthy J.E & Perreault W. D. 1996). The competitiveness of the aviation industry is explained below using Porter’s five forces model which comprises of the following factors: Entry of competitors, threat of substitute, bargaining powers of buyers, bargaining powers of suppliers and rivalry among the existing players. The bargaining powers of suppliers depend on how strong the sellers are. In this case, Qantas has many suppliers that are meant to keep pace with the growing demand of aircraft products and other accessories. Rivalry among the existing players shows that increased market competition is another external factor that influences quanta’s market. Their major competitor is Virgin Blue. To counteract this market division and to maintain market superiority Qantas adopted a two brand strategy by launching Jetstar as their low cost airlines. In this case focus is on the company’s ability to capture the market and sustain its dominance over other competitors. Bargaining power of buyers could be used as an essential lead in order to purchase the goods, snacks and other necessities for services much cheaper. Internal analysis of the environment The main strength of Qantas is that its present performance is quite handsome in view of its stated strategic direction. In this regard it is seen capitalising on this advantage in a bid to create new opportunities while at the same time striving to minimise the weaknesses that may challenge its operations. The vision of the organisation is designed in a manner that will ensure employee dedication to their work. Of notable concern is Qantas’ vision which is to create the world’s best premium and low fares airlines. To achieve this, the strategy is to work together with a shared commitment to the highest standards of ethics and integrity while fully complying with the relevant laws and regulations. The strategic direction for Qantas was mooted in 2005 where the Qantas Group delivered strong results and advanced plans for a successful and sustainable future. The Group’s two-brand strategy, supported by its portfolio of other assets, remains central to its future growth plans and success. The organisation’s performance is carefully designed in such a way that the employees’ needs and interest are given priority. 5.0 Organisational performance during a five year strategic period To a larger extent, it can be noted that the two complementary airline brands – Qantas and Jetstar – continue to meet the needs of different market segments. Qantas and Jetstar continue to give the Group an optimal 65 per cent Australian domestic market share, and the best opportunities to develop an expansive and profitable international network. The Group’s portfolio businesses and investments continue to provide strategic flexibility and earnings diversification. In its strategic direction for the five year period, Qantas has managed to perform above average expectations though it has also encountered some ups and downs which can be attributed to the changes in the economy. The financial results of the year 2005 shows that the organisation posted a profit of $1,027.2 million, an increase of $62.6 million or 6.5 per cent. Net profit attributable to members of Qantas was $763.6 million. The major strategies for the airline in 2005 included investing in airport products with a major expansion and enhancement of QuickCheck kiosks throughout Australia. It also sought to secure a strong position in the Asia value-based airline market following its merger with Valuair and increasing portfolio diversification through continued growth of air freight businesses. The company is performing above expectations as a result of several factors. The pillars of the Group’s strategy are attributable to safety as a first priority, backed by an unwavering commitment to world’s best safety practices and reporting. Indeed, safety takes precedence in the aviation industry for the success of any airline that is true to its vision. The group also performed above expectation in its five year strategic direction as a result of the fact that it has the right aircraft on the right routes, with fleet renewal delivering one of the world’s most effective fleets flying on an optimal route network. The customer service is excellent and which allows operational efficiency while achieving simplicity and further productivity across the business. It can as well be noted beyond doubt that the two strong complementary brands – Qantas and Jetstar are the best premium and low fares brands respectively. An analysis of the organisation’s financial performance over the five year period shows a positive development though the organisation has certainly encountered some challenges in its operations. An analysis of the sales statistics in comparison with the previous records for the same period shows that there is an increase in the number of sales which means that there is positive development as far as performance appraisal of the company is concerned. The profitable growth of both of the organisation’s two major flying brands, Qantas and Jetstar, continues to be its core strategy.Qantas is committed to remain focused on long-term growth, developing an innovative two brand strategy and investing billions of dollars in fleet, product and customer service, while also working hard to attack inefficiencies, change work practices and lower the cost base. True to its commitment, Qantas took a major step forward in establishing a world-class maintenance repair and overhaul operation in Australia in March 2006 when it announced its commitment to keep a wide body heavy maintenance work onshore. The organisation has managed to set some tough efficiency targets to ensure that it can compete in this area, where overseas providers are able to achieve a cost advantage of 15 to 20 per cent over Qantas. Despite the unfavourable economic factors obtaining in 2006/7, net passenger revenue increased by 8.0 per cent, including fuel surcharge recoveries, reflecting a 7.9 per cent improvement in yield which excludes unfavourable foreign exchange rate movements. In 2008, Qantas’ Profit before income tax expense (PBT) was $1407.6 million, an increase of $442.5 million or 45.9 per cent. Its major strategic direction for this year was to invest in the most sustainable and technologically advanced aircraft, taking into consideration safety, fuel efficiency, passenger comfort, cost and environmental factors such as noise emissions. Thus, in spite of the costs involved in this exercise, profit attributable to members of Qantas was $969 million. This was achieved on a 4.0 per cent increase in capacity and a robust demand environment during the first three quarters of the year in both domestic and international markets despite strong competition and higher fuel prices. In 2009, the new generation A380 and the B787 Dreamliner remained central to the future of the Group`s flying businesses. However, profit before related income tax expense (PBT) was $181 million, a decrease of $1.2 billion or 87.1 per cent. Profit attributable to members of Qantas was $117 million. This was achieved despite a 1.9 per cent decrease in capacity and a declining demand environment in both domestic and international markets as well as strong competition. Though the macro environment was not favourable to the organisation, it still managed to achieve its desired goals. Refer to appendix 3 for the financial performance of Qantas. Above all, the performance of individual and the team is the focus of the group by providing education and training courses, employees are expected to treat customers nicely, fairly and respects them all the times. It can be noted that the organisation performed above average through knowledge management which is a virtue in the running of an organisation. The employees are equipped with knowledge and they are given the opportunity to acquire the much needed skills to perform various tasks expected of them. This is mainly achieved through socialization of the employees at Qantas. Thus, socialization posits that individuals are quick to learn through interaction. Through his cognitive learning theory, Vygotsky (1962, 1968) believes that social growth is caused mainly by social interaction. Psychologically, an individual can use his mind to learn something with the aim of changing behaviour towards something while external factors can as well play a pivotal role in influencing the behaviour of somebody. In this way development is meant to improve the welfare of an identified target group which share common values and norms. True to their mission, the Qantas group is committed to achieve all its strategic goals through the efforts of the other people. The performance of the employee can be attributed to the success of the above mentioned organisation. The rules guiding recruitment process at Qantas are transparent and there are measures in place that are meant to ensure that the employees are not tempted to engage in corrupt practices such as accepting large gifts which can amount to extortion or bribe. Efforts are made to treat the employee as a valuable asset to the organisation where the workers should meet certain standards of performance so as to ensure that they achieve the organisational goals. Indeed, measures such as training the workers to meet the expectations of the organisation’s operations are in place so as to ensure that the organisation maintains its competitiveness by upholding similar standards of performance. By virtue of this stance and commitment, it can be noted that to a larger extent, the organisation has been performing above average in its five year strategic period. When it comes to environmental responsibility Qantas group has a green program, which is aimed at reducing the impact of environment in the business and invest in technology and fuel-efficient aircraft. Knowledge management and engagement of employees, suppliers, shareholders and customers about safe energy, water and environment are all factors that have positively contributed to the performance of the airline. The strategy to purchase more fleets is capable of better fuel efficiency and this can result in cheaper budgets for the coming years, and can also play a huge role in the carbon offset program which most countries are participating in, in order to prevent the global warming. This strategy has helped provide the Qantas group with great reputation as well as one of Australia’s biggest economic and environmental contributor, which should become an significant factor when customers decide on which airline to fly with. Such measures greatly contribute to the overall performance of the airline. 6.0 Recommendations Though Qantas has a clearly laid down strategic vision and has been performing above average standard expectations during the five year period from 2005 to 2009, it is recommended that it should streamline its operations to focus on core business which includes freight and passenger service. The organisation should not embark on business which involves many strategic business units as these may lead to losses in the event of economic downturn. 7.0 Conclusion Over and above, it can noted that strategic management is mainly concerned with key strategic decisions that are implemented in an organisation where careful use of the employees to achieve these through their performance is seen as a virtue. A close analysis of the performance of Qantas over a five year strategic period from 2005-2009 shows that it has performed above average to a larger extent. Indeed, the organisation has encountered some challenges in the environment in which it operates but it can be noted that its performance has been positive. Bibliography Armstrong, G. & Kotler P.(1996) Principles of Marketing, 7th Edition, Englewood Cliffs: Prentice Hall. Berry T. & Wilson D. (2001), On Target: The Book of Marketing plans. How to develop and implement a successful marketing Plan. Palo Alto Software, Inc USA. Carrell, R. et al (1995). Human Resources Management: Global Strategies for managing a diverse workforce. 5th Edition. NY. Prentice Hall. Jackson et al (2001), Management, Oxford University Press Lancaster G. & Reynolds P. (1999), Introduction to Marketing: A step by step Guide to all the tools of Marketing, Kogan Page Kotler P., 1999. Kotler on marketing: How to create, win and dominate markets. McCarthy J.E & Perreault W. D. (1996), Basic Marketing: A Global Managerial Approach, 12th Edition, Irwin McGraw-Hill, USA. Robinson W (1997), Strategic Management and Information Systems, 2nd Edition, Prentice Hall, UK Schultz et al (2003). Organisational behaviour. CT. Van Schaik Publishers. Smith P.R. (1999), Great Answers to Tough Marketing Questions, Kogan Page, UK. Vygotsky, LS (1978). Mind in Society: The development of higher Psychological processes. Boston. University Press. Appendix 1 2005 REVIEW OF FINANCIAL PERFORMANCE x Profit from ordinary activities before tax was $1,027.2 million, an increase of $62.6 million or 6.5 per cent. Net profit attributable to members of Qantas was $763.6 million. x Earnings before interest and tax (EBIT) increased by $23.5 million or 2.1 per cent to $1,121.7 million. x Qantas mainline operations contributed EBIT of $965.1 million, an increase of $101.6 million or 11.8 per cent on the prior year. Excluding the impact of segmentation recharges, EBIT increased by 0.3 per cent reflecting the significant increase in fuel prices during the year. RPKs increased by 2.1 per cent on capacity growth of 4.4 per cent, resulting in a decline in seat factor of 1.8 percentage points. Yield, excluding the unfavourable impact of foreign exchange rate movements, improved by 2.6 per cent. The capacity increase reflected the addition of new A330-300 aircraft in the international business and the impact of reduced flying in the first quarter of the 2003/04 year due to SARS. Capacity was also increased on key business and long-sector routes in the domestic market, which offset the reduction in capacity following the transfer of the 717 aircraft to Jetstar. x Australian Airlines reported an EBIT loss of $11.6 million compared to a profit of $1.1 million in the prior year. Excluding the impact of segmentation charges of $9.3 million, EBIT declined by $3.4 million. This underlying result reflected difficult trading conditions in the second half due to the impact of the Asian tsunami, travel warnings to Indonesia, weak leisure demand from Japan and higher fuel costs. x QantasLink contributed $42.9 million in EBIT, down $54.1 million or 55.8 per cent on the prior year. Excluding segmentation recharges of $44.3 million, EBIT declined by $9.8 million or 10.1 per cent. The decline in EBIT largely reflects the retirement of five BAe146-100 aircraft in the first half, resulting in a capacity reduction of 3.4 per cent. RPKs decreased by 2.7 per cent, with seat factor improving by 0.5 percentage points. Yield, excluding the unfavourable impact of foreign exchange rate movements, improved by 1.7 per cent. x Jetstar recorded an EBIT result of $44.1 million for the year, compared to an EBIT loss of $23.4 million in the prior year whilst largely in start-up mode. Jetstar’s total cost per ASK for the year was 8.00 cents, which is below its full year operating cost target of 8.25 cents per ASK. Second-half unit cost was 7.62 cents per ASK. x EBIT for non-flying subsidiary businesses declined by $78.8 million or 49.2 per cent reflecting the progressive implementation of financial reporting system changes to transition the Qantas Group into three separate business types (Flying, Flying Services and Associated Businesses) supported by a Corporate Centre. Recharges from Qantas to subsidiaries totalled $98.6 million. The recharges included IT, airport and distribution costs based on a more accurate allocation of activities. 2006 REVIEW OF INCOME STATEMENT • Profit before related income tax expense (PBT) was $671.2 million, a decrease of $243.1 million or 26.6 per cent. Profit attributable to members of Qantas was $479.5 million. • PBT for Qantas operations (including QantasLink and Australian Airlines) totalled $578.4 million, a decline of $212.4 million or 26.9 per cent on the prior year. Net passenger revenue increased by 8.0 per cent, including fuel surcharge recoveries, reflecting a 7.9 per cent improvement in yield (excluding unfavourable foreign exchange rate movements) and a 1.0 point increase in seat factor to 77.2 per cent. Capacity increased by 0.8 per cent reflecting the commencement of services to Beijing and San Francisco and the new Dash 8-Q400 turboprop aircraft within QantasLink, offset by the transfer of some trans-Tasman and domestic flying to Jetstar. Net expenditure increased by 11.5 per cent, predominantly due to the impact of fuel price increases and restructuring costs. • Jetstar recorded a PBT result of $10.8 million which included $4.0 million of start-up costs for trans-Tasman operations and $10.2 million in costs associated with the launch and set-up of Jetstar International. Excluding these costs, Jetstar’s PBT was $25.0 million, which was a decline of $10.6 million on the prior year. PBT was impacted by increased fuel costs and higher lease costs reflecting the transition to an all A320-200 fleet. • PBT for non-flying subsidiary businesses declined by $15.2 million or 11.3 per cent largely due to reduced PBT by Qantas Holidays and the write-down of the investment in Orangestar. 2007 Review of Income Statement Profit before related income tax expense (PBT) was $1,032.1 million, an increase of $360.9 million or 53.8 per cent. Profit attributable to members of Qantas was $719.4 million. This was achieved on a 3.4 percent increase in capacity and reflected the strong operating environment over the year in both the domestic and international markets. PBT for Qantas operations (including QantasLink and Australian Airlines) totalled $865.0 million, an increase of $288.1 million or 49.9 per cent on the prior year. Net passenger revenue increased by 11.5 per cent, including fuel surcharge recoveries, reflecting a 8.7 per cent improvement in yield (excluding unfavourable foreign exchange rate movements) and a 3.4 point increase in seat factor to 80.6 per cent. Capacity decreased by 1.4 per cent reflecting the transfer of some trans-Tasman and domestic flying to Jetstar, offset by the new Q400 turboprop aircraft within QantasLink. Jetstar recorded a PBT result of $87.4 million, an increase of $75.1 million, which included $28.0 million of start-up costs (2006: $14.2 million). Excluding these costs, Jetstar’s PBT was $115.4 million, an increase of $88.9 million on the prior year. PBT improved as a result of a 42.9 per cent increase in domestic passenger revenue and the successful launch of Jetstar International, offset by increased fuel costs and higher lease costs reflecting the transition to an all A320-200 fleet. Jetstar’s passenger revenue exceeded $1 billion for the first time this year. PBT for non-flying businesses was $79.7 million, a decrease of $2.3 million or 2.8 per cent. 2008 Profit before income tax expense (PBT) was $1407.6 million, an increase of $442.5 million or 45.9 per cent. Profit attributable to members of Qantas was $969 million. This was achieved on a 4.0 per cent increase in capacity and a robust demand environment during the first three quarters of the year in both domestic and international markets despite strong competition and higher fuel prices. PBT for Qantas operations (including QantasLink) totalled $935.3 million, an increase of $166.2 million. Net passenger revenue increased by 2.9 per cent reflecting as increase in seat factor to 81.4 percent. Capacity decreased in the international market as a result of shifting some services to Jetstar. Domestically, QantasLink thrived on the introduction and the full year benefit of three new Q400 aircraft. Jetstar recorded a PBT result of $115.7 million, an increase of $33.8 million. Passenger revenue increased by $366.5 million or 35.8 per cent, largely driven by a 44.1 per cent increase in capacity, arising from the continued expansion of the Jetstar International network. Costs increased in line with increased activity and higher fuel prices. PBT for the portfolio businesses totalled of $353.0 million. Qantas Frequent Flyer was the largest contributor to the portfolio businesses with PBT of $233.9 million in current year. This was an improvement of $23.3 million compared to the prior year. A number of non-operating items were included in the results for the year. These items were liquidated damages of $290.7 million, freight cartel provisions of $63.7 million and accelerated depreciation and asset write-downs of $164.5 million. 2009 Profit before related income tax expense (PBT) was $181 million, a decrease of $1.2 billion or 87.1 per cent. Profit attributable to members of Qantas was $117 million. This was achieved despite a 1.9 per cent decrease in capacity and a declining demand environment in both domestic and international markets as well as strong competition. A number of significant items were included in the results for the year. These items included a profit on sale of Qantas Holidays of $86 million, a change in Frequent Flyer accounting estimates which increased revenue by $164 million, of which $84 million is non-recurring, redundancies of $106 million and accelerated depreciation and impairment losses of $170 million. Meanings of Profit Equations Net Profit Margin (%):The profit margin tells you how much profit a company makes for every $1 it generates in revenue or sales. Profit margins vary by industry, but all else being equal, the higher a company's profit margin compared to its competitors, the better. Operating margin (%):The operating margin is another measurement of management’s efficiency. It compares the quality of a company’s activity to its competitors. A business that has a higher operating margin than others in the industry is generally doing better as long as the gains didn't come by piling on debt or taking highly risky speculations with shareholders' money. Gross Profit Margin (%):The gross profit margin is a measurement of a company's manufacturing and distribution efficiency during the production process. The gross profit tells an investor the percentage of revenue / sales left after subtracting the cost of goods sold. A company that boasts a higher gross profit margin than its competitors and industry is more efficient. Return on Asset (%):Where asset turnover tells an investor the total sales for each $1 of assets, return on assets, or ROA for short, tells an investor how much profit a company generated for each $1 in assets. The return on assets figure is also a sure-fire way to gauge the asset intensity of a business. Return on Equity (%):Return on equity reveals how much profit a company earned in comparison to the total amount of shareholder equity found on the balance sheet. A business that has a high return on equity is more likely to be one that is capable of generating cash internally. For the most part, the higher a company's return on equity compared to its industry, the better. http://beginnersinvest.about.com/od/incomestatementanalysis/a/understanding-return-on-equity.htm Read More