Qantas Strategic Management - Report Example

Strategic Management Name Name of Institution Table of Contents Executive Summary 3 Introduction 4 Internal Environment Analysis 4 Industry Analysis 6 Macro Environment Analysis 8 Market Analysis 10 Strategy Adopted by Qantas 11 Problem Facing Qantas 11 Recommendations 12 Conclusion 12 Executive Summary This report by examining Qantas internal environment to show that its objective is to become the best premium airline in the world. The company relies on a two-brand strategy that offer services to the high and budget segments. Key organisational resources include a flexible fleet of 303 aircraft, state-of-the-art technology, strong financial resources, strong brand, highly-skilled human resources, and membership in the Oneworld alliance. Regarding performance, the report shows that Qantas has adopted the stakeholder approach where strong financial performance is backed by considering other stakeholders and undertaking CSR activities. The five forces framework shows that Qantas’ profitability is constrained by the high threat of new entrants and medium levels of rivalry. When it comes to analysis of the macro-environment, the political environment has proven to be unfavourable to the airline industry due to relaxation of restrictions to boost tourism. The market analysis shows that there is continued growth, but there are significant seasonal variations in demand. The market also shows that Qantas serves two consumer segments that have considerable differences in price sensitivity. The evaluation of the internal and external environment leads to the conclusion that Qantas Airways employs a differentiation strategy. The paper recommends retaining this strategy. However, changes are needed in leadership to facilitate better implementation of the strategy and secure Qantas’ long-term position as a leader in the industry. Strategic Management Introduction The airline industry has the distinction of being one of the most competitive and cost intensive sectors that a business can select owing to factors like the threat of new entrants and continuous innovation from existing competitors. The proliferation and popularity of low-cost carriers illustrates the competitiveness of the airline industry. This paper focuses on the airline industry as a whole and Qantas Airways Limited in particular as the sector provides a challenging environment from a strategic management perspective. Qantas is a strong Australian brand and a foremost player in long distance operations that was founded in 1920. The company employs over 30,000 individuals with a significant majority being based in Australia. Qantas offers services that go beyond transportation, with the firm owning several subsidiaries like QantasLink and Jetstar as well as other businesses that offer catering, travel, and holiday services (Qantas 2016). In recent years, the company has faced significant challenges that led to massive losses. Changes in the operating environment and a turnaround strategy allowed the firm to regain profitability in 2015, with profits rising to $557 million from the previous year’s $2.84 billion loss (Ryan 2015). This paper presents an analysis of Qantas and its environment to identify the strategy adopted by the firm. An understanding of the firm’s overall strategy will facilitate the identification of potential areas of weakness in strategy, leading to recommendations on strategies that will improve Qantas’ performance. Internal Environment Analysis Qantas’ business objective is to leverage its two brands to transport customers to local and international destinations. The brands are Qantas which serves the premium end of the market and Jetstar which can be considered as a low-cost no-frills airline. When it comes to mission, the company aims to become the leading premium airline in the world by working with partners, having a global network, maintaining safety, and providing exceptional travel experiences to clients (Qantas 2016). According to Hill and Jones (2011, p. 108), organisational resources can be divided into tangible and intangible resources when evaluating a firm’s distinctive competence and competitive advantages. Regarding tangible resources, Qantas operates a fleet of 303 aircraft with the firm acquiring six planes in 2015/16 and removing three aircraft from the fleet (Qantas Annual Report 2016, p. 18). Problems such as the global financial crisis, rises in fuel prices, terrorism, and increased competition from Virgin had created a volatile operating environment that contributed to Qantas poor performance (Qantas Group Strategy Update 2014). As such, flexibility is the primary motivation when it comes to the fleet size, with the firm retaining the ability to respond to any changes in market and industry conditions (Qantas Annual Report 2016, p. 18). Qantas long history has also led to strategic advantages when it comes to ownership of property, plant, and equipment. The return to profitability in 2015 and 2016 is also indicative of a strong position when it comes to financial resources. The company also draws on state-of-the-art technology that powers yield management, ticketing, pricing, and response to disruptions (Smith 2015). When it comes to intangible resources, the Qantas brand name, history, and share of Australian market are areas of competitive advantage. The organisation also benefits from a growing frequent flyer program that continues to attract new customers while retaining existing ones (Qantas Annual Report 2016, p. 21). The significance of the program can be seen in its $395 million revenue in 2016. The airline is also part of the Oneworld Alliance which seeks to provide the highest level of convenience and service to global destinations (Qantas 2016). Another critical resource is Qantas’s highly trained workforce. The firm employs 30,000 workers and has invested flight training that ensures the proficiency of 12,000 workers on an annual basis (Qantas 2016). As stated, Qantas has recovered from tough conditions to deliver strong performance. Regarding finance, the company generated $1.53 billion in profit in 2015/16 which translates to an EPS of 49.4 cents per share. This strong performance allowed the firm to issue a dividend of 7 cents per share and initiate a share buyback program worth $366 million (Qantas Annual Report 2016). The company’s dedication to sustainability indicates that it takes the stakeholder approach where it balances the profit objectives with the needs of a broad array of stakeholders (Fernando 2009, p. 49). This can be seen through the firm giving priority to health and safety, security, and the environment. Additionally, the firm exhibits strong performance in corporate social responsibility through practices such as flying medical patients, assisting during disasters, and helping communities in areas where the company operates (Qantas 2016). Industry Analysis It is essential to understand the industry in which a firm operates to develop an understanding of the strategies available to the firm. According to Hill and Jones (2011, p. 56), an industry defines a collection of companies that offer products that are close substitutes and which serve the same customer needs. In the case of Qantas, the firm operates in the aviation segment of the transport industry. Michael Porter developed a framework that can assist managers in understanding an industry. The framework has five factors which are the risk of entry of competitors, the threat of substitutes, the level of rivalry among existing firms, and the bargaining power of buyers and suppliers (Hill & Jones 2011, p. 57). According to Porter, the strength of these five forces determines an organisation’s ability to increase prices and earn higher profits. In the case of Qantas, the threat of new entrants is high as a result of government policies that welcome foreign airlines to drive up tourism (O’Sullivan 2015b). Qantas strong brand and history, customer loyalty, and high entry barriers due to the high investment needed have a moderating impact on this high threat. When it comes to rivalry among competitors, Qantas faces a medium level of competition from Virgin. In the period before 2015, Virgin increased the level of competition as a result of a $300 million investment from three government funded airlines and unfavourable aviation policy (Qantas Group Strategy Update 2014). However, 2015 saw a significant reduction in the rivalry between the two airlines in both domestic and international markets (O’Sullivan 2015a). Concerning substitutes, the threat is low for both the direct and indirect substitutes. Qantas two airlines serve the high-end and low-end segments of the market meaning that customers do not have to look at other airlines to save costs or experience premium service. For indirect substitutes, the location of Australia in the world and its large size means that air travel is significantly better than road and water transport. The bargaining power of buyers varies since Qantas serves premium clients and leverages Jetstar to serve the low end of the market. Premium clients like business travellers are price insensitive and thus have a low bargaining power. On the other hand, the low end of the market has a high bargaining power since they can switch to rivals with ease. As such, the overall bargaining power of buyers is medium in the aviation industry. When it comes to the bargaining power of suppliers, the threat remains at a low level. Most airlines in the world acquire their fleet from either Boeing or Airbus who produce planes that share the same features (Kumar 2016, p. 207). Their position is further weakened by having to invest in energy efficiency to attract the attention of airlines (The Economist 2014). As such, the suppliers have a weak bargaining power since airlines can easily shift to the other producer. In summary, recent changes in the industry have resulted in the weakening of the five forces thereby explaining Qantas return to high profitability. Macro Environment Analysis Having examined Qantas’ internal environment and the industry in which it operates, it is essential to consider some of the factors that are outside the firm’s control and which will affect the performance of the firm. The PESTLE analysis is a critical tool as it captures actual or potential factors that determine whether an organisation can achieve its objectives (Kachru 2009, p. 84). The political environment is the first area that is of concern to the aviation industry. The regulatory environment has been unfriendly to Qantas with the government allowing foreign airlines to invest in Virgin while still allowing to retain bilateral flying rights (Qantas Group Strategy Update 2014). The government has also entered into a trade deal with China that will reduce restrictions on foreign carriers owing to the government’s ambitious targets for tourism growth (O’Sullivan 2015b). According to O’Sullivan, the tough political environment has forced Qantas to partner with Emirates to reduce losses. Another political factor is the Qantas Sales Act which makes Qantas a private entity that is still regulated in a way that does not apply to other airlines (ABC News 2014). Going forward, the Trans-Pacific Partnership between the Australia, the US, and ten other states across the Pacific will be beneficial for Qantas’ premium and budget units (Wall 2015). When it comes to the economic environment, it remains favourable to Qantas, especially when compared to the conditions during the global financial crisis. Globalisation has boosted tourism, with the weaker Australian dollar making the country attractive for both domestic and international tourists. Oil prices have also fallen drastically to allow airlines to operate with bigger profit margins (Creedy 2015). Social trends have also been favourable to the airline industry with many individuals preferring to fly and engage in tourism. As noted earlier, technology is a key resource for the airline industry with Qantas making huge investments to control yield management, online ticketing, pricing, and response to disruptions (Smith 2015). Going forward, advances in technology will create new opportunities for the industry that will boost performance in the airline industry. When it comes to ecological issues, there is widespread acceptance that the aviation industry has a considerable impact on the environment through its emissions that contribute to global warming (Lee et al. 2009, p. 3534). This realisation has created a trend where airlines have to monitor the efficiency of the fleet to improve environmental outcomes. Additionally, airlines have to comply with Commonwealth, territory, state, and international environmental legislation (Qantas Annual Report 2016). It is worth noting that a carbon tax that applied to the industry has been removed. Finally, the aviation industry operates in a tough legal environment with airlines having to deal with the costs of expensive class action suits. For example, Qantas had to contribute to $650,000 to a $39.5 million settlement for price fixing (Bird 2015). On the other hand, the legal environment also allows airlines to obtain massive settlements. For instance, Qantas received $95 million from Rolls-Royce because of a defective engine that led to an explosion and grounding of the entire Airbus A380 fleet (Wassener 2011). Market Analysis Qantas ownership of the both a premium and a low-cost airline allows it to serve two distinct consumer segments. Qantas serves the business traveller segment which is notable for being price insensitive. This segment is notable for wanting premium quality when it comes to lounges and in-flight experiences. Some of the features availed to this segment include account managers, online travel management, reward programs, and custom payment solutions (Qantas for Business 2016). Qantas serves the budget end of the aviation market through the Jetstar subsidiary. These consumers utilise the services of the airline in the same way as the business travellers, but they are very sensitive to costs. It is worth mentioning that the budget end of the market also includes business travellers from small and medium enterprises. The services offered to this consumer group includes low costs, domestic and international flights, flexible booking, and monthly reports to keep track of expenses (Jetstar 2016). The overall market is experiencing growth with total domestic passengers rising from 57.33 million in 2015 to 58.44 million in 2016. The number of international travellers also increased from 33.865 million to 36.229 million in the same period (Department of Infrastructure and Regional Development 2016). It is also notable that the market experiences significant fluctuations in demand with peak demand occurring between November and February. The conclusion from the market analysis is that key success factors in the industry include differentiation, low costs, brand reputation, and quality. Strategy Adopted by Qantas Business strategy defines the manner in which a firm goes about achieving its goals in a given industry or segment. In other words, business strategy defines how a business acquires competitive advantages that facilitate the achievement of set goals (Hubbard, Rice & Galvin 2014, p. 21). Businesses have three options when it comes to generic strategies, and these include the differentiation, focus, and cost leadership strategies (Hubbard, Rice & Galvin p. 180). An examination of Qantas’ internal environment, industry, market environment, and macro-environment shows that it has adopted the differentiation business strategy. The major feature of this strategy is creating a unique product that offers satisfaction in a way that allows customers to ignore alternatives (Hubbard, Rice & Galvin 2014, p. 180). The inclusion of a full service and budget airline contributes to Qantas desire to be a unique airline. A look at Qantas also shows that it is one of the oldest and strongest brands that is synonymous with Australia. Its mission shows that the firm seeks to grow to serve a global market as the leading premium airline. Problem Facing Qantas The critical analysis of Qantas Airways Limited shows that it faces a myriad of problems that prevent better performance. The first problem is a tough industry environment where the threat of new entrants and competitive rivalry are high. The second strategic issue comes from poor leadership at the firm. In as much as the company executed a successful turnaround strategy, the firm remains very vulnerable to the actions of its main competitor and new entrants. It is arguable that the oldest and most recognisable brand in Australia should innovate and implement strategies that change the industry and forces the rivals to alter their strategy. The other problem facing Qantas is Australia’s hostile political environment that provides little protection for domestic firms. As a factor in the external environment, this issue cannot be fully controlled by Qantas. Despite these challenges, Qantas should not alter its current differentiation strategy. Rather, there should be a review of how the management implements the firm’s strategy. Recommendations The paper has found that the key success factors in the aviation industry include differentiation, low cost, quality, and brand reputation. It is recommended that Qantas initiate an aggressive marketing campaign to reinforce its position as Australia’s preferred carrier. This should be combined with improvements in service quality, customer service, and route expansion to retain existing clients and attract new ones. It is also recommended that these strategies should be implemented by a new leadership team that will reinforce Qantas position as the leader in domestic and regional travel. These strategies will allow the firm to mitigate the threat of new entrants while taking a leading position in competing with its main rival. In the long run, a strong and profitable Qantas that employs thousands of Australians will have the clout to lobby for a friendlier political environment. Conclusion The critical analysis of Qantas Airways internal and external environment shows it has a long history that includes both success and failures. The firm has to be aggressive in implementing its business strategy to remain relevant in an increasingly competitive industry and challenging macro-environment. This report argues that the company should not alter its current diversification business strategy that relies on two complementary brands and strategic partnerships. The report suggests a change in leadership, aggressive marketing, and a strategic expansion of routes especially in Trans-Pacific Partnership member states. A stronger Qantas will be able to thrive despite higher competition and tough market conditions. References About Qantas, 2016, Qantas Airways Limited, viewed 24 September 2016 About us, 2016, Jetstar, viewed 26 September 2016 Airbus and Boeing playing duopoly, 2014, The Economist, viewed 25 September 2016 Aviation Statistics, 2016, Department of Infrastructure and Regional Development, viewed 26 September 2016 < http://www.the-star.co.ke/news/2016/09/27/credit-rations-fears-as-kcb-stops-mobile-loans_c1427201> Bird, J 2015, Transpacific lawsuit, CHOICE, viewed 25 September 2016 Creedy, S 2015, Qantas, Virgin benefit from low oil prices, The Australian Business Review, viewed 25 September 2016 Fernando, AC 2009, Corporate Governance: Principles, policies, and practices, Pearson Education. 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