Bargaining Power of Suppliers and Buyers - Case Study Example

Case Study Case Study Question One Bargaining Power of Suppliers There are two factors that influence the bargaining power of suppliers in the airline industry. First, all the three inputs carriers rely on to stay afloat (fuel, labor, and aircraft) fluctuate heavily depending on the external environment. This means that airlines have little control over the availability and cost of these inputs at any one time (Wheelen, Hunger, Hoffman, & Bamford, 2010). This gives the suppliers great bargaining power, which is not healthy for current and potential investors. Second, aircraft are always either sold or leased on long-term contracts; there is no in-between. In addition, only two main manufacturers supply all the aircraft used in the industry: Boeing and Airbus (Barney & Hesterly, 2014). This makes the airline industry one of the most favorable for aircraft manufacturers and robs carriers of vital bargaining power. Ultimately, carriers have little or no power over the prices and availability of aircraft, yet this is their core input. The bargaining power of suppliers is too slanted in favor of suppliers. Bargaining Power of Buyers Buyers in the airline industry have several aspects that give them an edge over competitors: variety, intense competition, price wars, government protection, and the entry of online ticketing and distribution services (Barney & Hesterly, 2014). These factors imply that buyers enjoy a moderate to high bargaining power, which is also not healthy for competitors. As such, competitors have been forced to relinquish power to flyers in the long term. Threat of Entrants This threat is very low because of the amount of capital and the risks involved in venturing into the US airline industry (Vasigh, Fleming, & Humphreys, 2014). Very few investors have the financial capability required to successfully compete in the industry, and those that do are reluctant to confront the demands and risks involved. In addition, successful entrance demands a lot of skill, knowledge and experience; that is why rivals like to “poach” employees from one another. Threat of Substitutes This threat is very low because unlike in developing countries where travelers prefer water, rail and road travel because they are cheaper, the level of competition in the US has ensured that flying is very affordable (Vasigh, Fleming, & Humphreys, 2014). In addition, the US has a very strong culture of flying, which is similar to the popularity of road transport in developing countries. As such, it is extremely unlikely that any other transport mode can overtake flying. Competitive Rivalry The US airline industry is extremely competitive. It is easy for competitors to be partially or completely locked out of the market if they cannot keep up with market conditions and changes. This makes it very easy for competitors, even the most established ones, to fail (Barney & Hesterly, 2014). The combination of low-cost carriers, a very strict regulatory environment, and outdated and passive industry business model, and overregulation on the supply side mean that full-service airlines face too many challenges compared to other sectors. The industry favors low-cost carriers. I must say that I agree with Mr. Buffet because out of the five forces, three critical forces (bargaining power of buyers and suppliers and competitive rivalry) do not favor competitors. This makes Mr. Buffet’s assertion 60% true. Question Two: Southwest Airlines Competitive Advantage Southwest uses a very intensive and effective cost leadership strategy. As a low-cost carrier, its success is dependent on providing, according to its marketing mantra, the most affordable flying rates in the US airline industry. In fact, the cost leadership strategy employed by the company has been so successful that it has grown to become the largest budget carrier in the world (Wheelen, Hunger, Hoffman, & Bamford, 2010). The company has implemented this strategy by focusing on low operational costs and limited bonus services, which is supported by direct ticketing to eliminate middlemen and reduce the fees paid to travel agencies and ticketing firms to book flights. This carrier is strictly focused on moving passengers from one place to another; it does not even sell food or beverages on flights. Southwest’s competitive advantages are created by four factors: low cost, human resource (HR) capabilities, effective marketing, vision, and dynamism (Vasigh, Fleming, & Humphreys, 2014). The low-cost dimension is the biggest source of competitive advantage, mainly because rivals have, for a long time, been unable to replicate the company’s affordable ticket prices. In terms of HR, Southwest has skilled and extremely loyal employees who are dedicated to making the company successful (Wheelen, Hunger, Hoffman, & Bamford, 2010). The company has been effective in aligning its HR dimension with its overall corporate strategy, and this has enabled its employees to drive its growth and expansion. The company uses various employee motivation methods to keep its staff happy and ensure that the effect spreads to consumers. Based on McGregor’s Theory Y, Southwest has ensured that its workers are satisfied with their jobs and are motivated to work for the success of the company, not money. This is visible in its extremely high retention rate, which is 92.3% (Barney & Hesterly, 2014). This is impressive, especially for an airline in such a competitive sector. The company has an innovative and aggressive marketing division which has enabled it to position itself excellently and differentiate itself from competitors. For instance, its Rapid Rewards mileage program is one of the most flexible and customer-oriented in the industry. Unlike other programs that favor airlines, this one is genuinely aimed at satisfying consumers (Wheelen, Hunger, Hoffman, & Bamford, 2010). This has successfully portrayed the company as customer-friendly and innovative, two qualities that have propelled it to the top of the US airline sector. Southwest’s vision and dynamism have been central to its success. Unlike large carriers that are bogged down by bureaucracy and high operating costs, Southwest designs all its strategies to guarantee future success (Wheelen, Hunger, Hoffman, & Bamford, 2010). The company is very flexible and has aggressively moved to revamp its facilities, aircraft, and operating mechanisms to remain relevant and successful in the long term. Based on the VRIO criterion, the more sustainable and less sustainable competitive advantages at Southwest can be classified as follows: More Sustainable Vision and dynamism Human resource capabilities Less Sustainable Low-cost strategy Effective marketing Using the VRIO criteria, vision and dynamism are rare, valuable, very organizable, and hard to replicate. These features are cultivated over long periods, and rivals find them difficult to ape. Human resource factors such as happy employees are also valuable, rare, very organizable, and hard to copy (Barney & Hesterly, 2014). Even successful companies tend to struggle to keep their employees happy. In the less sustainable category, Southwest is already facing the threat of new budget carriers that are eating into its market share. The strategy can be copied and implemented by any rival (Vasigh, Fleming, & Humphreys, 2014). Also effective and aggressive marketing can be easily replicated with adequate finances and qualified staff. References Barney, J., & Hesterly, W. (2014). Strategic management and competitive advantage: Concepts and cases (5th ed.). Upper Saddle River, N.J.: Prentice Hall. Vasigh, B., Fleming, K., & Humphreys, B. (2014). Foundations of airline finance: Methodology and practice (Revised ed.). Farham (Surrey): Routledge. Wheelen, T., Hunger, J., Hoffman, A., & Bamford, C. (2010). Strategic management and business policy: Achieving sustainability (12th ed.). Upper Saddle River, N.J.: Prentice Hall. Read More