Formulating a New Strategy for Virgin Atlantic Airline - Case Study Example

Formulating a new Strategy for Virgin Atlantic Airline Table of Contents Table of Contents 2 0 Formulating a new Strategy 3 1 Brief Theories on (planning strategy) 3 1.2 Planning strategy 3 SWOT Analysis 4 PEST Analysis 4 Porters Five Force Analysis 5 1.3 Strategic Plan 6 1.3.1 A new strategy plan for Virgin Atlantic Airline 6 2.0 Understand approaches to strategy evaluation and selection: 8 2.1 Explaining three strategies 8 2.1.1 Collaboration strategy 8 2.1.2 Diversification Strategy 9 2.1.3 Transformational Strategy 9 Source: Shaw (2007) 10 Strategies and their Suitability 10 Evaluating techniques 11 Ranking & scoring method and Risk analysis 11 Acceptability of the Strategy 13 Returns 13 Feasibility 14 People and skill set 15 1.0 Formulating a new Strategy 1.1 Brief Theories on (planning strategy) There are a number of theories on strategic planning but this discussion briefly explores two theories of change: An organizational theory of change and a program theory of change. The program theory of change incorporates reasons why an organization avails its services in the manner it does to its customers. Specifically, it is concerned with what the business hopes its customers will achieve, and the way and why its services enhance those outcomes (Kotter, 1996, p. 2-4). The organizational theory of change, on the other hand, embraces all aspects the business must undertake in a unique way, in order to maximize its capacity to deliver or avail its program theory of change (El-Namaki, 2008, p. 24). The organizational theory of change raises the following aspects: who, exactly, are their client population The end results or outcomes the organization is aiming for, and the way such outcomes could be recognized and even evaluated. The kinds of services to be delivered to assist their customers reach the outcomes they desire. The implications for the company in the context of internal operations and structures, support and additional staffing (Miller & Dess, 1996, p. 2-7). 1.2 Planning strategy Planning strategy encompasses analyzing a business particularly from both a technical and marketing perspective mostly through a comprehensive audit in order to establish a direction for company activities (Henry, 2008). These processes are usually undertaken by the planning strategy team. This team undertakes research and even monitoring of developmental activities in order to help in the preparation of strategic planning policies, guidance and proposals which will determine or shape the manner in which the business is developed in the future. SWOT Analysis Strengths Weaknesses Opportunities Threats The company has a universal appeal Has some areas that are highly underdeveloped More than 280 airports with Asian pacific region The threat of terrorism affects business Efficient team of management Mostly concentrate on European market Still has opportunities within Europe Tough airline regulation on mergers Innovative features Its alliances are still in maturity stages Alliances and mergers Competitors like Qantas buying new aircrafts Strong organizational structure Focus on expansion is not strong especially in Asian market Increased tourism Highly recognized company Asian market is highly promising Source: Virgin Atlantic.com PEST Analysis Political factors: Political instability in the Middle East and neighboring Asian countries The “Open Skies” policy is likely to assist or help Virgin Atlantic airline to grow in United States market Economic factors: The rising prices of oil and other environmental restrictions exert pressure on the financial performance of the airline According to the forecasts IATA, in the last two years, the highest growth rates in the airline industry have been registered within East Asia, China and thus the Asian market is very significant for international air travel. Social factors: The customers are majorly attracted towards the economical flights. The Asian market has many business and individual travelers who are willing to use airline services Technology: With globalization, technology that enhances customer service is highly developed and this is defining the industry competitiveness. Source: Shaw (2007) Porters Five Force Analysis Threat of New entrants: The threat of new entrants is very low Because of the high capital requirement it is not easy for any business to venture in airline industry The lack of landing and take-off slots makes it hard for any new airline to find airports that are strategic and suitable Supplier Power: Suppliers of oil have more power a virgin company does not produce oil. Suppliers of airline have low bargaining power as they are many and virgin airline may shift to those that are low priced. Buyer Power: Buyer power and the competitive price are moderately strong, because clients often shop around using internet for the better price. Likelihood of Substitutes: No threat for airline of both international and domestic routes There is very minimal threat from other forms of travel such as buses, cars and train on domestic route and completely on international route given that it would cost more than the cost of airplane and is time consuming. Source: Shaw (2007) 1.3 Strategic Plan 1.3.1 A new strategy plan for Virgin Atlantic Airline Based on internal analysis of the company, Virgin Atlantic Airline takes up huge amounts of capital, and their cost base is approximately 10 percent higher in relation to that of their key competitors. Therefore, it is not an option to do nothing, or even tinker around the edges. The new five-year plan has the following objectives: 1- To offer one new destination to the passengers that other competitor airlines do not go to by the end of 2014. 2- Adopt new methods in training on 70% of cabin crews by the end of year 2014, to provide quality service to the passenger weather; they are first class, business class or economy passengers. 3- Benefit passengers through offering them lower fares by 15% on destinations that competitor gives in higher fares by the end of year 2014. 4- Increase the number of online check-ins by 50% by the end of year 2014. By achieving quality service to passengers by offering new destination and in-flight services which meets passenger’s expectation and needs. Also, considering passenger’s feedback, suggestions and comments, will help enhance service quality. By achieving these objectives Virgin Atlantic will increase their customers’ loyalty and satisfaction, which led to a higher profit. Increasing in the number of passenger checking-ins online that help to save time and overhead cost of the airline. The plan specifically addresses the challenges confronting the Virgin Atlantic Airline in international market and has four elements: I. Growing with Asia II. Opening new gateways to the world III. Being best for international travelers IV. Establishing a strong, viable brand These goals will be attained via a number of key initiatives: A ‘gateway’ strategy specifically to connect Virgin Atlantic customers to major international cities in collaboration with partner airlines and capitalize on the membership of the loyalty program, including the following initiatives: I. Restructure of Virgin Atlantics’ Joint Services Agreement with Delta Air Lines to enhance the airlines’ Asian segment – with daily the Boeing 747 and A380 services from Sydney and Melbourne to London through Singapore. II. The continued enhancement of Virgin Atlantics’ joint business agreement with Transaero Airline based on Virgin Atlantics’ services to Moscow. III. Exploring opportunities to work with Tiger Airways to enhance the airlines operations from Hong Kong to inland China. Investment in service and product to ensure that the customer experience of virgin Atlantic Airlines continues to satisfy the highest international standards: I. Sustained focus on enhancing rewards and points-earning opportunities for Virgin Atlantics’ Frequent Flyers for Virgin Atlantics’ most regular clients, airline partnerships and network improvements. II. Build new premium lounges in Hong Kong, Los Angeles and Singapore. III. Introduce the next-generation Boeing 777-800 airplanes particularly on trans-Tasman services in addition to launching of Virgin Atlantics’ faster, smarter check-in technologies for flights between London and Australia. To turn the airline into a strong, viable brand, the following changes will be made to the Virgin Atlantics Group fleet plan. I. Addition of about 100 Airbus A320 airplanes to support the growth capacity of the Group as well as extension into new international markets, including a new premium airline based in Asia. II. Reconfigure B777s with A380 airline as well as the reconfiguration of A380 airlines to enhance efficiency by matching demand to the capacity of the airline. 2.0 Understand approaches to strategy evaluation and selection: 2.1 Explaining three strategies 2.1.1 Collaboration strategy Virgin Atlantics Airline will adopt strategies to cut down its flight services specifically the short hour flights and will replace them with flights from its newly acquired subsidiary-Tiger Airways. This will involve flights between Hong Kong and Singapore and even those between Japan and Australia. It will then concentrate in long hour flights in order to reduce its costs. Currently, trends in the market entail the introduction or adoption of low airfares in the long hour flights and Virgin Atlantics Airline will be reducing its airfares as it strategizes on how to recapture its global market share. It will invest more in long hour flights and leave the short hour flights to its Asian subsidiary. Virgin Atlantics Airline will enhance its services and capacity by significantly investing in double deck A380’s, and developing its customer services via tailored training and enhancing its airport lounges. 2.1.2 Diversification Strategy On top of the current type of aircrafts, A380’s, the company will introduce Boeing 777-787. Furthermore, A380’s business class seats will be upgraded to match the standard of Boeing 747 business class seats. In other words, plans entail removing the first class and the business class seats in order to create more space for the premium economy classes based on the fact that have been experiencing high demand in the global market. Furthermore, the Airbus A380’s will actually be upgraded and reconfigured to incorporate in-flight entertainment. This is in response to the increased demands from the global market. In general, this strategy is aimed at increasing the company revenue, and increased customer satisfaction. However, in areas where demand still exists, the company will maintain its first class services particularly in A380’s. 2.1.3 Transformational Strategy The airline will transform its operations via a five-year strategy plan in the pursuit to improve its services and at the same time maintain the standards of service it has actually set for its clients and international operations. This plan will also help the company deal with the emerging trends in the market including the low-prices or low airfares that are impacting its incomes. Since, there are no signs of low airfares changing anytime soon; the airline will therefore transform its core services to match the situation in the market. The transformation program will is expected to benefit the airline by delivering more than $0.5 billion across its different areas of operation. 3-Explain strategy evaluation in brief theory (ranking and scoring method, /suitability, acceptability, feasibility /risk assessment). The proposed strategies will be evaluated using the three SAFe criteria: Suitability: this will concerned with the whether the proposed strategies address the key opportunities and constraints of the company. Acceptability: will emphasize three aspects: the risk of the strategy, expected returns and the likely response of the stakeholders. Feasibility: will seek to find out whether the organization has or can obtain the required capability to deliver a strategy. Suitability Does the proposed strategy addresses the opportunities and constrains of Virgin Atlantic Airline? Acceptability Does the proposed strategy meet the stakeholder’s expectations? Is the level of Risk acceptable? Is the likely return acceptable? Feasibility Would the proposed strategy work in practice? Can the strategy be financed? Do people and skills exist or can they be obtained? Can the required resources be obtained and integrated? Source: Shaw (2007) Strategies and their Suitability Strategic Option Reasons why this option is suitable in terms of Environment Capability Retrenchment Pull out from declining market in order to maintain market share of the airline Suitable when identifying and concentrating on viably established strengths Market Penetration Helps in gaining market share for competitive advantage Suitable for exploitation of superior capabilities and resources Product Development Exploit knowledge of end user needs Suitable for exploitation of research and Development Market Development Good when existing markets are saturated: thus it offers new opportunities for entering new segments and geographical spread. Suitable to exploit current products/services and capabilities Diversification Suitable when current markets are declining or saturated Suitable for exploiting strategic capabilities in new areas Organic Development Suitable when acquisitions or partners not available or not suitable Suitable for building on own capabilities learning and competence development Merger/acquisition Suitable when services/products are needed in speed supply Suitable for acquiring capabilities and large economies of scale Joint Development Suitable when services are speedily required or when it is the tradition of industry and also required for market entry Suitable for acquiring complementary capabilities and learning from partners Source: Shaw (2007) Evaluating techniques Ranking & scoring method and Risk analysis Under Ranking & scoring method, options are evaluated based on rating and ranking of different options. Strategic options are evaluated against specific criteria. After which scores are given and the best option is selected. Ranking process Strategic options Key Strategic factors and objectives Fit with technical competencies Fit with sector Know-how Reduced lower fares for clients Additional Destination Develops Bigger clients Establishing a strong, viable brand Increased competition Ranking Retrenchment ×   × ×  ? 3-3 (C) Market Penetration   ?  × ×  4-2 (B) Product Development   × × ? ?  3-2 (B) Market development   ×  ? ×  4-2 (B) Diversification   × ×    5-2 (B) Organic Development × × ×   ?  3-3 (c) Merger/acquisition   ?   ×  5-1 (A) Joint Development        7-0 (Α) Source: Author Key: = favorite, ×= unfavorable,?= irrelevant or uncertain Α = most suitable, Β = possible, C =unsuitable Therefore, from the above table, two strategies are suitable to help the company achieve its endeavors: joint development and Merger/acquisitions. Acceptability of the Strategy There are three key aspects of acceptability which include: Risk, Return and Reactions of stakeholders. Using break even analysis, it is easier to determine which strategy is best for Virgin Atlantic Airline. Market and Cost Structure Market leader Joint development Merger/acquisitions Cost to initiate $10 $8 $12 Total variable cost (TVC) $3.50 $3.00 $4.50 Contribution to profit per passenger $3.50 $5.50 $4.50 Fixed Cost $1,000,000 $1,000,000 $1,000,000 Break even point 142,721 80, 790 136,345 Total market size 630,000 630,000 630,000 Break even point market share 20.8% 10% 19% Actual market Share 29.9% - - Source: Author Returns These are the financial benefits that stakeholders will get from the strategy. In this case, the shareholder returns will be analyzed using real options. This is because it brings together strategic and financial evaluation together, values emerging options, copes with uncertainty and offsets conservatism. Initial investment Joint development Merger/acquisitions Source: Author Feasibility Two aspects are considered here: Do current resources and competencies currently exist to implement the strategy effectively? If not can they be obtained? In so doing the evaluation will consider funding sources and financial strategies at different business stages. Lifecycle phase Funding requirement Cost of capital Business risk Likely funding sources dividends Development/Launch High High High Equity/Venture Capital Zero Growth High Low/medium High Debentures and equity/growth investors Nominal Maturity Low/medium medium medium Debt equity and retained earnings High Decline Low/negative Medium/high Low debt High Source: Author People and skill set Skill set and Strategy Joint development Work organization No change needed incentives Appropriate Training and development Current systems are appropriate staffing The levels and skills of current staff is appropriate Source: Author References El-Namaki, M. 2008, Strategy and entrepreneurship in Arab countries. Basingstoke: Palgrave Macmillan. Henry, A. 2008, Understanding strategic management. Oxford: Oxford University Press. Kotter, J. 1996, Leading change. Boston: Harvard Business School Press. Mennen, M. 2010, Global Corporate Strategy - A Critical Analysis and Evaluation of Amazon.com. München: GmbH. Miller, A., & Dess, G. 1996, Strategic management. New York: McGraw-Hill. Shaw, S, 2007, Airline Management and Marketing, Ashgate Publishing Read More