Beating Low-Cost Competition - Case Study Example

Malaysia Airlines 1. Steps that an established carrier such as MAS should take to counter the threats posed by low-cost competitors Low cost competitors poses the threat of offering highly discounted air travel that attract price conscious consumers and other travellers, who more often than not, become used to cheaper fares and opt not to use higher priced, higher service airlines as indicated in Case4. As a result, they slash the profit margins and market shares for established firms such as MAS. To counter threats posed by low cost competitors such as AirAsia, MAS among other established firms should develop and effective strategies that do not necessarily focus on pricing only but those that offer more value and service excellence to the customers. Among the strategies the established firms can implement includes Service differentiation; this will entail offering air travel services that are not only competitive in terms of pricing but also, those that meet high quality standards in terms of safety, comfort and reliability (Kernchen, 2007). Delivery of service differentiation can be achieved by developing a reliable, competent, valuable, innovative and skilled human resource workforce that is able to meet the changing needs, demands, expectations and preferences of the customers as noted in Case4. This will entail creating a synergy between the professional growth of each employee and the growth of the airline in the present and in the future. Investing in innovation; to create service differentiation and to promote sustainable competitive advantage, established airlines such as MAS must invest in innovation in order to deliver services that exceed the expectations of the customer. More importantly, such firms need innovation to aid in cost reduction and savings, enhancing operational excellence and attracting suitable strategic partners (Kernchen, 2007). To encourage innovation and development of new, better and differentiated services, established airlines such as MAS can invest in technology. Technology is a suitable and reliable resource in managing service delivery by an airline. This is because, technology can be utilized to refine booking systems, automate procedures, facilitate use of direct routing and facilitate simulator training all of which contribute a huge difference to the experiences of the customer. In addition, web based marketing can be used to enhance service delivery, where the airline can effectively and promptly address every need and concerns of the customer and receive customer’s feedback and more importantly, allowing the customer to take part in the decision making process in regards to what flight they take, where they sit, what they eat and even selecting their inflight entertainment as noted in Case4. Increasing passenger loads; low- cost airlines such as AirAsia has focused on increasing their savings by offering short routes only, which minimizes accommodation expenses for its cabin crew (Ayupp n.d). Established airlines such as MAS can capitalize on this by covering long routes but increasing the passenger loads to counter the additional expenses. This can be achieved by the established airlines investing in large capacity, modern and long haul aircrafts, which are costly for low cost airlines to invest in owing to the high capital requirements needed to purchase them. These types of aircrafts include Airbus A380 (Ryans, 2009). Established firms such as MSA should continue with its financial restructuring exercise which entails extensive asset unbundling and separation of the firm’s balance sheet from its operations in order to ensure the firm is able to withstand the present and future hostile market and economic environments as highlighted in case 4. In so doing, the established airlines will be better placed to counter threats posed by low cost competitors in the present and long into the future. 2. The major driving forces for MAS as per Porter’s five forces model The porter’s five forces model highlight the five forces, which influences the competitiveness and thus, the attractiveness or overall profitability of an industry or market (Porter, 2008). Based on the model, there are major driving forces for MAS which includes Intensity of competitive Rivalry; the degree of competition or rivalry within an industry greatly affect the attractiveness of the industry (Porter, 2008). The airline industry within the South East Asian region is highly competitive and dynamic owing to the role cities in ASEAN play as business destinations and tourist destinations as highlighted in Case 4. The degree of rivalry facing MAS is determined by market concentration. MAS has had to strive against stiff rivalry from low-cost airlines such as AirAsia in terms of pricing and readily accessible e-tickets. There is minimal service differentiation between airlines and there are low switching costs for customers using alternative airlines, which increases the rivalry faced by MAS. Owing to the high degree of rivalry, MAS has developed and implemented BTP and BTP2 and the ‘Everyday Low Fares’ to not only counter the rivalry but also enhance its competitive advantage both in the present and in the future. Threats of substitute services; a major driving force for MAS include the threat of substitute services which includes trains, public service vehicles and other types of motor vehicles. The switching costs from airline services to substitute services are relatively low although the pertinent significance of substitute services varies based on the route, purpose of travel and the type of customers. The use of ‘Everyday Low Fares’ by MAS counters the threat of customers switching to substitutes, as customers using domestic routes are accessible to free services as noted in Case4. Threat of supplier bargaining power; the threat of supplier bargaining power facing MAS is generated in form of rates of wages for the workforce. Remunerations take a significant share of airline’s operating expenses. Airline employees have high bargaining power owing to the high degree of career portability across all staffing levels as indicated by Case4. This has driven MAS to develop and implement Performance- Linked Compensation program and Performance Management System in order to attract and retain the best employees in the airline industry and sustain synergy between organizational development and career development of each employee (Ayupp n.d). Threat of buyer bargaining power; the degree of threat of buyer bargaining power facing MAS is influenced by customer type and route. Shorter routes have high number of rivalries who include low-cost airlines and there is increased accessibility to substitute services by customers (Shaw, 2011). Longer routes are less concentrated, which provide an opportunity for MAS to cover long routes and increase her passenger loads. Business travellers are less concerned by prices in contrast to travellers travelling for leisure and family vacation who are sensitive to prices and prefer substitutes respectively as noted in Case4. Threat of new entry; the threat of new entry into the airline industry in South East Asia is high and is set to increase the degree of competition. Owing to the high rate of business opportunities generated by ASEAN cities being increasingly critical business and tourist destinations, major international airlines may seek to enter the market as indicated in Case 4. This present a threat to local airlines such as MAS, who have invested in infrastructure, who may have to pave way for larger international airlines that have better capacities and resources to attract significant portion of the market. Other than major international airlines as the main threats in entering the market, local airlines can easily enter the airline industry and market owing to the continuing liberalization of ASEAN skies, which contributes to the enhanced intensity of competitive rivalry (Shaw, 2011). This is bound to affect MAS negatively as it has to share the market share, which it has worked hard to gain. Figure 1 illustrates the Porter’s five forces model as it applies to MAS Forces Rate of threat to MAS 1. Threat of new entry Relatively High 2. Threat of substitute services Moderate 3. Bargaining power of customers Moderate 4. Bargaining power of suppliers High 5. Intensity of competitive rivalry High Figure 1: Porter’s five forces model as it applies to MAS 3. Macroeconomic challenges that will affect MAS in the future Other than the stiff competition that MAS faces from low –cost airlines such as AirAsia in the present and in the future, MAS is expected to face even greater macroeconomic challenges in the future (Uwagwuna, 2011). These macroeconomic challenges ranges from hostile economic and market environments as a result of global recessions, the increase in the costs of fuel which increases operating expenses for MAS and the rising security threat associated with threats of terrorism (Gillespie, 2010). In addition, the expected overcapacity of the airline industry is likely to result in intense competition, which slashes profits for MAS. These challenges will compel MAS to identify, formulate and implement effective and efficient strategies that will ensure that MAS offers competitive prices for its service offering, enhances its service standards in terms of reliability, safety and comfort and more significantly, take advantage of the opportunities generated by present and future economic challenges, which has the potential to develop new value for MAS which it would not in other circumstances and in ordinary environment obtain (Ayupp, n.d). Among effective and efficient strategies that MAS is using to counter present threats and to safeguard against the identified macroeconomic challenges in the future includes the BTP, Performance –Linked Compensation program, Performance Management System and BTP2 plan that addresses the areas of enhancing service standards, cost reduction, offering competitive fares, increasing passenger loads and broadening MAS network’s in India, ASEAN and in China (Ayupp, n.d). References Ayupp, K. Case 4: Malaysia Airlines: A business turnaround. Kualar Lumpar: University Malaysia Sarawak. Gillespie, A. (2010). Business Economics. Oxford New York: Oxford University Press. Kernchen, N. (2007). Marketing differences between traditional airlines and low-cost airlines in Europe. München: GRIN Verlag GmbH. Porter, M.E. (2008). The Five Competitive Forces That Shape Strategy. Harvard business Review. Ryans, A. (2009). Beating Low Cost Competition: How Premium Brands can respond to Cut-Price Rivals. New York: John Wiley & Sons. Shaw, S. (2011). Airline marketing and management. Farnham, Surrey Burlington, VT: Ashgate. Uwagwuna, C. (2011). How the Macroeconomic Environment of the Airline Industry Affects the Strategic Decision of Boing Vs Airbus A Case Study. München: GRIN Verlag GmbH. Appendix Porter’s five forces model as it applies to MAS Forces Rate of threat to MAS 1. Threat of new entry Relatively High 2. Threat of substitute services Moderate 3. Bargaining power of customers Moderate 4. Bargaining power of suppliers High 5. Intensity of competitive rivalry High Figure 1: Porter’s five forces model as it applies to MAS Read More