Strategic Management of British Airways - Case Study Example

British Airways Name Course Name and Code Instructor’s Name Date Executive Summary British Airways is a lucrative airline that is focused on providing exclusive services to its customers. The airline is regarded as the leading global carrier and hence it is strategically placed increase it competitive advantage and hence dominate the industry for unforeseen period. The airline industry is highly competitive and thus British airways management strategies are formulated to sustain the company’s market share in the global market. The airline is aiming at improving employee relations, segment focus, technological advancement, and highly differentiate itself from its competitors in order to become an airline of choice. For instance, the premium product is exclusive found at British Airways. Consequently, the core competencies that the company has, has placed the company far away from the reach of its competitors; the sole access to certain airports in the UK. Table of Contents Executive Summary 2 Table of Contents 3 Introduction 5 Products 5 Geographical markets 6 Mission, Vision and Values 6 Corporate social responsibility 6 External Environment 7 Industry attractiveness 7 Competitive rivalry 7 Bargaining power of suppliers 8 Bargaining power of buyers 8 Threat of new entrants 8 Threat of substitutes 9 Environmental stability 9 Political factors 9 Economic factors 9 Social factors 10 Technological factors 10 Environmental factors 11 Legal factors 11 Company Financial performance 11 Financial strength of the company 11 BA financial performance for the past five years 12 Competitive Strategy 12 Porter’s Generic Strategic framework 12 Resource Based View 14 Threshold competencies 15 Core competencies 15 Strategic Direction of Development 15 Key strategic issues 16 Ansoff’s growth vector 17 Methods of Development 18 Conclusion and Recommendations 19 Recommendations 21 Bibliography 22 Appendix 1 23 Introduction British Airways Airline is the UK’s largest international scheduled airline with vast domestic destinations. In general the airline flies to more than 550 destinations across the globe. Consequently, alongside scheduled services, the airline also offers both international and domestic freight, mail and ancillary services. After privatization of the company in 1987, the company has eminently continued to grow regardless of the ever increasing competition in the market across the world (British Airways Report, 2009). Across the airline industry their have been economic hits particularly due to global economic downturn, nonetheless, the future of BA is filled with hope. For instance, the company aims at becoming the world’s most responsible airline by developing guiding principles with focused strategic decisions that will allow the company to achieve this vital goal. Products BA offers two Product categories; short haul and long haul products. Short haul are products that are mainly centred to UK and Europe, these products include; UK Domestic which is British Airways’ economy class on domestic UK flights. Business UK; this operates the same cabin as UK Domestic but has pre-flight lounge access. Euro Traveller is BA’s economy class offering flights from UK to Europe at large. Club Europe is BA’s short haul business class on all short haul flight, except within the UK. Long haul products include: First; this is the long haul first class service on BA that is offered only on Boeing 777 aircraft. Club World; it the long haul business class on Boeing 767, 777, 747, and Airbus A318 aircraft; and the World Traveller; is the long haul economy class that is offered on international flights to destinations outside Europe. Further, the British Airways World Cargo; this is tasked with offering freight services through all BA flight routes. Geographical markets British Airways is a multinational airline that operates in different markets across the globe. The airline operates in more than 130 countries worldwide including Europe, Asia, USA, South America, Middle East Australia and Africa (Capon, 2008). The airline has excellent services and quality and hence is regarded as a leader in the airline industry serving approximately more than 35 million passengers annually. Mission, Vision and Values The company has a strategy of becoming the world’s leading premium airline. The vision of the company is to be the airline of choice for long-haul premium customers, deliver outstanding services for customers at every touch point, grow its presence in global cities, build on its leading position in London, and meet its needs and improve margins through new revenue streams. The company intends to achieve the mentioned objectives through colleagues, customers, performance, excellence, and partnership. Corporate social responsibility BA’s corporate responsibility is to become the world’s most responsible airline; the company’s corporate strategy is centred on: workplace; ensure sustainable employment for current employees and become the employer of choice in future. Marketplace; work with suppliers together with customers to build more sustainable business. Environment; make sure that the company minimizes its impact on the environment, including the contribution to climate change, air quality, noise and waste. And lastly, community investment activities; the company supports diverse community projects both in the UK and Overseas. External Environment Success in the airline industry demands full awareness of the external environment within which the airline operates. With regard to this, this part will describe the main factors that impact Industry attractiveness and Environmental stability. Industry attractiveness In order to understand the competitive nature of the airline industry and the BA position, Porter’s five forces of competition will be used to analyze the attractiveness of airline industry. This will substantially help the company in making strategic decisions in an effort to increase its profitability. This framework views the profitability in any industry as determined by the five sources of competitive pressure. These forces include competition from substitutes, new entrants, established rivals, bargaining power of consumers and bargaining power of suppliers. These elements will be discussed independently (British Airways Report, 2009). Competitive rivalry The competitive rivalry in the industry is very high; British Airways serves both long haul and short haul flights. There is no significant differentiation between BA and their competitors in terms of price and service offering particularly in long haul segment. In the global alliance industry, BA provide Boeing and cargo services and their main competitors include Lufthansa airlines, Swiss airways, Virgin Atlanta, delta, FedEX, and DHL (British Airways Report, 2009). However, in order to maintain its leading position in the industry, BA offers quality services at the same price with other competitors. The short haul market segment is highly fragmented with many small players. Bargaining power of suppliers There are only two aircraft manufacturers thus making their bargaining power to be exponentially high (Capon, 2008). Consequently, BA is restricted by a sole fuel supplier to the airport. Priority of landing spots is given to historic rights of existing users. Consequently, BA employees use collective bargaining through trade unions in order to increase their bargaining power. Bargaining power of buyers The customer bargaining power in the industry is medium. The airline industry is highly competitive and hence prices in the keep on changing day by day to attract customers. The concentration of buyers is very low as compared to service providers thus they have little bargaining power. Consequently, increased use of internet has amplified customer awareness and interaction hence making them opt for cheaper services. Threat of new entrants There are significant barriers to new entrants in the industry hence making the threat of new entrants to very minimal. For instance, the competitive environment, high regulatory requirements, together with high capital cost requirements have made the industry to less attractive to new entrants. Consequently, there exists barriers exit from the industry thus deterring new entrants. For example, the failure of XL and Zoom airlines has ultimately made the industry less attractive to new entrants. Threat of substitutes Substitute threat is very low in the airline industry; for instance in the long haul flights there are virtually no notables substitutes. For short haul flights the only available substitutes are Eurostar or ferry. Environmental stability PESTEL Analysis will be used to describe the airline industry environmental stability. Political factors The airline industry has been impacted heavily by turmoil political environments in the recent past. For instance the terrorism attacks of September 11, 2001 in New York and July 7, 2005 in London together with Iraq war, the political turbulence in the Middle East and civil wars in Africa have undoubtedly caused unprecedented crisis in the airline industry. With regard to this, new security regulations have been put in place which resulted into reduced customer travelling confidence. In essence, governments control where airlines can fly together with their aspects of planning and pricing policies. Given these facts, airline companies BA included need systems that enhance quick decision making. Trade laws have empowered trade unions. The power of trade unions is eminent thus can cause significant implications to companies through strikes. Regulations on employee rights, customer rights, and upsurge in environmental and ecological issues are some of the factors that airlines like BA must consider. Economic factors Air travel is highly characterized with high income elasticity, for instance if the global economy grows then the demand for global air travel will also increase. The war in Iraq contributed largely to the increase in fuel prices; this has considerably increased the operational costs of various airline industries BA included. Fluctuations in oil prices and exchange rates have a direct impact on BA’s cost base. The slow down in economic growth means reduced business operations as companies focus on cutting costs and using alternative means of communications like teleconferencing. The consumer spending has sharply declined for the past 13 years especially in the UK; this implies that there will be extremely high competition in the industry. Social factors Social and cultural influence on business varies from country to country thus it is important for multinational companies to consider such factors as demographics and culture. These factors help in defining customer needs and the size of the market potential. UK has a large number of aging populations and thus there is a potential opportunity for BA to grow further as older generations tend to have more time to spend on leisure activities like international travel and tourism. Consequently, the unemployment rate is increasing at high rates in UK hence BA has an increased bargaining power as an employer. Technological factors The current customer trend in airline industry is the use of compensation sites; this increases customer awareness thus amplifying their bargaining power. Consequently, online booking services and check-in is increasingly used by airline companies; with regard to this, BA must constantly update their marketing technology in line with the current technological advancements to remain in the lead. However, they must also not overly rely on technology as they might isolate some customers who are not comfortable using such technologies (British Airways Report, 2009). Environmental factors Various controls have been put into place in order to conserve the environment; for instance noise pollution controls and energy consumption controls have diverse effects on the airline industry. In this regard, BA must ensure that they comply with new legislations like the Climate Change bill which enforces tougher environmental regulations in order to reduce costs that may result form suits of violating the latter. The land for expanding airports is limited, thus any attempt to expand Heathrow airport may result into London losing its Green belt area; this implies limited capacity. Legal factors Various laws like Collusion and price fixing has restriction on mergers thus impacting negatively on the proposed merger between BA and American Airline (Ireland, 2009). Furthermore, recognition of trade unions and industrial action like Cabin Crew strikes implies that BA must come up with good employee relations if the company is to avoid any industrial action and interrupted operations. Consequently, the open skies agreement is an opportunity to BA as it is to its competitors to freely and easily transport aircrafts between the EU and US. Company Financial performance Financial strength of the company The financial strength of British Airways is alarming; for the last two years the company has been consistent in making huge loses that are mainly attributed to lower passenger numbers, higher operational costs and impacts of strike action. For instance, for the year ended 31st March, 2010 the company made its biggest ever loss of £531 million since it was privatized in 1987 in addition to £401 million loss that was experienced the previous year. The high fuel bill of approximately £3 billion, the weak pound, and the abrupt deterioration in most of BA’s significant markets like the transatlantic business customers particularly because of the banking crisis are the main cause of the loss. Further, due to recession the company was forced to use up to £483 millions of its reserves to sustain its operations thus exposing the company to future loses. BA financial performance for the past five years Year Ended Passengers Flown Turnover (£m) Profit/loss before tax (£m) Net Profit/loss (£m) Basic EPS (P) 31 March 2010 31, 825,000 7,994 (531) (425) (38.5) 31 March 2009 33,117,000 8,992 (401) (358) (32.6) 31 March 2008 34,613,000 8,753 883 696 59.0 31 March 20o7 33,068,000 8,492 611 438 25.5 31 March 2006 32,432,000 8,213 616 464 40.4 (British Airways Report, 2009). Competitive Strategy Porter’s Generic Strategic framework The generic competitive strategies developed by Porter are cost leadership; for instance any company that is a low cost leader in the market has a competitive advantage over its competitors because it is able to produce at lowest costs. Differentiation: according to this strategy, the company can differentiate its products and services to meet rather satisfy customer needs through a sustainable competitive advantage. For instance companies can desensitize prices while focusing on value that generates comparatively higher prices and better margins. And lastly, focus or niche strategy; here the organization concentrates its efforts and resources on a narrow, defined market segment; for instance the competitive advantage is generated specifically for the niche. British Airways has heavily focused on differentiation to gain competitive advantage over its competitors. Given the mission of becoming the world’s premium airline; value added, differentiated customers that customers want automatically provides the basis of premium prices. Owing to the fact that airline industry is highly competitive, BA believes that providing high quality services, the company will be able to levy premium prices across all its services. Additionally, BA’s business process are customer driven, for instance the airline is determined to make flying experience to be as effortless and pleasant as possible (Johnson, et al., 2011). With regard to this the company recruits and employ’s right people for the right positions; staff attend customer service training programs and they are also empowered to make decisions with regard to any given circumstance to ensure customer satisfaction. In the same line of argument, BA use focus groups to determine and establish what customers value and need; consequently, research is conducted as to why customers defect to other airlines and necessary improvements done to add value. In this regard, differe3ntiation has led to many changes; BA’s airport lounges are part of the total package and hence they are stuffed with drinks, snacks, and telephones that are offered freely to premium passengers. Consequently, the company has fast-track check-in channels have been installed for premium passengers to move through immigration and customs with minimum delays. The company also ensures that Cabin crews are always available and visible throughout the flight thus increasing the levels of customer satisfactions. Further, sleeper services have been introduces for first class consumers on long-distance routes. Additionally, customers eat before boarding the flight, sleep onboard and use the arrival lounge to tidy up before going a head to attend to their chores. These elements have considerably differentiated BA from other airlines thus giving a competitive advantage. Resource Based View This strategy emphasizes the internal capabilities of the organization in formulating strategy to achieve sustainable competitive advantage in markets and industry. In essence, internal capabilities determine the strategic choices the organization makes in competing in its external environment; consequently internal capabilities can allow a firm to create new markets and add value for customers (Henry, 2011). RBV of competition is derived from the resources and capabilities that reside within the organization or those that a firm might want to develop in order to achieve a sustainable competitive edge. RBV is based described using tangible resources, Intangible resources, threshold competencies and core competencies. The resource based view with regard to British Airways is given below. Threshold Resources; these are physical resources that an organization posses including plant and machinery, finance and human capital (Thompson & Martin, 2010). These resources can be acquired by competing organizations. The tangible resources for BA include a fleet of 245 aircraft accessing over 550 destinations; additional services such as BA Holidays, and London Eye company. The intangible threshold resources include international customer database, partnerships and alliances with ‘oneworld’ codeshare/franchise partners and subsidiaries. Unique resources; these are embedded routines and practices that have developed over time within an organization and cannot be emulated by competitors (Thompson & Martin, 2010). These include organizations reputation, culture, its knowledge and its brand. BA’s unique tangible resources include sole access to LHR’s terminal 5. Intangible unique resources include the reputable brand; BA is a reputable brand that is recognized globally, reinforced by its longstanding existence within the industry. Threshold competencies These include; training ground school, flight simulation, and cabin safety training; the economies of scale from ongoing suppliers; and ability to fly and manage passengers safely on various routes. Core competencies Open skies’ subsidiary’s aircraft never have more than 64 passengers per flight with one attendant per twelve customers. Secondly, BA is the first UK airline recognized as a training centre by City & Guilds, qualifying all cabin crew with NVQ level 2 (British Airways Report, 2009). Strategic Direction of Development The currents strategic development of BA can clearly be reflected by its SWOT analysis Strengths Brand image Partnership and alliances Financial size and stability Terminal 5 Weaknesses Poor employee relations Reliability and trust Innovation and change Opportunities Sky Trax Quality system Competitors forced exit Competitors failing on delivering reliability Emergence of new markets Threats Open skies agreement Environmental awareness Global economic crisis Lower cost competition Key strategic issues With regard to PESTIL analysis the global economic crisis, higher regulatory requirements, increasing environmental awareness, decline in consumer spending and increased use of the internet by customers means that the company must change its strategies. For instance due to the mentioned issues, the company should focus on technological and environmental issues. Furthermore, from the Porter’s five forces; there is high rivalry and bargaining power of suppliers. In this regard the company must come up with defensive strategies to protect its market share. From the resource based view, the company has strong resources including sole access to hub within the largest UK airport and strong training competencies. In relation to this, BA should utilize its core competencies to gain competitive advantage. Ansoff’s growth vector Strategic management requires or involves decisions with regard to what the company might do in accordance with the available opportunities in its environment; given the resource at its disposal; personal values and aspirations of key decision makers; and given the ethical and legal context in which it is operating (Campbell et al., 2011). Given these facts a firm needs a clear definition of the direction in which it is heading to in future along with the concept business it is in. In this respect, the Ansoff’s growth vector will be used to analyze the strategic direction of BA. Market Penetration: BA is focused to improve relationship between people and processes; the main aim of doing this is to reduce tension from negative employees and customer relations. The company also intends to improve its environmental stance; the company targets going beyond the current environmental requirements (Johnson, et al., 2011). Consequently, BA has a strategic option of renovating its brand image; through renovation and modernization of brand image the company will gain market share. And lastly, the company intends to focus its marketing to segments; for instance focusing on business class customers will probably increase the profitability of the company. Product Development: Technological advancement; the introduction of the internet access on flights will enhance the overall service quality. Additionally, introduction of complementary services; BA is focused to offering complementary services like car rental or hotels. Market Development: Broader service offering; BA is geared towards increasing the number of destinations like focusing on potential areas of growth such as China and India. Diversification: Diversify into other transport markets; venturing into substitute transport services like rail will enhance and maintain the competitive advantage of the company. Further, supply chain migration; the vertical migration along the supply chain i.e. Gate Gourmet or Boeing will eventually increase the company’s competitive advantage. Methods of Development Through the history of BA, the company has used the following methods to develop and expand its services across the globe. Strategic Alliances; BA uses alliances with minority shareholders to extend its access and strengthen its position as a leading global carrier. BA has partnered with various airlines like US Air, Qantas, and TAT. Consequently the airline entered a strategic alliance with American Airlines, and Spanish flag carrier Iberia; the move has ultimately help these airlines cooperate on flights between North America and Europe. Acquisitions: BA acquired Denair to increase its UK-based domestic and European services while reinforcing its presence at Gatwick in addition to Heathrow. This significantly integrated the growth of the BA in early 1990s and formed the basis the company’s current diverse operations. Franchising: this is where an airline fly with the colours or under the brand of another airline while maintain its independence apart from the obligation to provide a level of standards that is consistent with that of the franchiser (British Airways Report, 2009). During the 1990s, BA used this method particularly in small market, the domestic market to provide feeder services to those of BA itself while complementing BA’s own services in certain geographic locations. The partner airlines have access to BA’s unique livery, products and service standards especially its brand name. Conclusion and Recommendations SPACE Analysis of any company is determined by four factors; the financial strength of the company, competitive advantage of the company, industry attractive, and environmental stability. Financial strength and Industry attractiveness are awarded +1to +6 points where +1 is the lowest score while +6 is the strongest score; competitive advantage and environmental stability are rated -6 to -1 where -6 is the lowest mark while -1 is the strongest mark (Simister, 2011). Financial stability, British airways has a strong financial base thus huge capital intensity thus is awarded +5, the industry attractiveness is moderate thus is a warded +3. Consequently, the company has a strong competitive advantage thus is awarded -1; the company operates in a moderately strong environment hence is awarded -2 (Simister, 2011). The SPACE Matrix analysis can be displayed as shown in the diagram below With regard to this the British Airways is highly aggressive (Appendix 1) Recommendations BA should focus on improvement to people and processes; the poor employee relations history together negative attention to BA’s reliability should be eliminated. The company should motivate, engage, support and develop employees alongside improving baggage handling and delay management at their resident airports (Punzel, 2011). The company should improve its environmental stance; the company has a strong brand and by strategically focusing on improving environment, BA will automatically remains a strong global competitor. For instance, the strategy will ensure that the company meets changes in the socio-economic dimension (Punzel, 2011). The company should improve its technological stance; for instance by installing in-flight entertainment facilities will lead to long term growth of the company. Strong focus of marker segments; this will align the company to comprehensively improve customer experience. Bibliography British Airways. 2009. Annual Report and Accounts. Retrieved on 6/12/2011 from http://www.britishairways.com/cms/global/microsites/ba_reports0910/pdfs/Strategy.pdf Campbell, D., Edgar, D., and Stonehouse, G. 2011. Business Strategy: An Introduction. London: Palgrave. Capon, C. 2008. Understanding Strategic Management. London: Prentice Hall. Gamble, J. E, & Thompson, A.A. 2011. Essentials of Strategic Management. New York: McGraw-Hill. Hall. Thompson, J. and Martin, F. 2010. Strategic Management: Awareness and Change. London South Western Henry, A. 2011. Understanding Strategic Management. Oxford: Oxford University Press http://www.differentiateyourbusiness.co.uk/space-analysis-strategic-position-and-action-evaluation-matrix Ireland, R.D., Hoskisson, R. E., and Hitt, M.A. 2009. The Management of Strategy. Sydney: South Western. Johnson, G., Scholes, K. and Wittington, R. 2011. Fundamentals of Strategy. London: Prentice Punzel T. 2011 Risks and Decision Making: Using the Example of British Airways. London: GRIN Verlag Simister P. 2011, SPACE Analysis – Strategic Position and Action Evaluation Matrix. Retrieved on 6/12/2011, from Appendix 1 Interpreting the SPACE matrix diagram Read More