Market Analysis for China - Jetstar Airways - Case Study Example

Market analysis for China (Name) (Institution) (Course name) (Course code) (Module) (Instructor’s Name) Date of submission The following report on the proposed entry of Jetstar Airways to the Chinese market was commissioned by the firm’s CEO on 25th May 2011. Information contained herewith is original and informed on facts and relevant theories on international business strategy and management. Prepared by (Signature)……………………. (Name) Introduction Jetstar Airways is an independent affiliate of Qantas Airlines based in Australia. The airline operates mainly in Australia and the Asia-pacific region. The company targets the low budget flyers. The firm has in since inception recorded impressive growth conquering new markets and setting a standard in low budget air travel. The company targets price sensitive air travellers from Australia, Singapore, New Zealand and the surrounding Asian countries. Since its inception in 2004, the company takes pride in redefining low cost flying in the region. From the company’s logo to the service and the pricing, the firm is a breath of fresh air in the airline industry in the Asia pacific region. The company is considering entering the China market in the near future. The following report compiles issues and alternatives that Jetstar should consider in making the decision. The report utilises theory to gain an understanding of issues involved from a resource-based view, industry-based view and institution-based view and gives recommendations. Literature review Resource based view The resource based view, perceives the firm as a bundle of resources both tangible and intangible. Proponents of this theory further say that organisations should be bent on strengthening their resource base to assist them in achieving sustainable competitive advantage. According to Mclvor (2005), The resource-based perspective views firms with superior systems and structures as being more profitable not because they engage in strategic investments that may deter entry and raise prices, but because they have significantly lower costs, or offer higher quality or superior products. Therefore, this approach focuses on the returns that the firm generates from owning a rare firm-specific resource rather than the profits obtained from selecting an industry” (53). This would imply that the ability of a firm to own and protect its firm-specific resources such as competence of the workforce or finances, positions the company ahead of competition. The resources owned by a firm influence competiveness of the firm in selected business processes. Ray, Barney and Muhanna (2004) say that a firm’s overall performance depends on among other factors how certain business processes are connected and related. The aggregation of these processes to make the whole organisation makes it difficult to attribute a certain set of resources and capabilities in creating a firm’s competitive advantage (Mclvor 2005). Ray, Barney and Muhanna (2004) recommend that firms should treat organisational performance as a dependent variable and particular sets of resources as independent variables and examine how the latter affects the former. The authors further strengthen their call for viewing organisational resources and capabilities from the business process level by stating that competitive advantage does not arise purely from ownership of resources but rather how these resources are employed optimally in particular business processes. Industry based view The industry based view postulates that a firm’s strategy is guided by its position in the industry and developments in the industry or market (Peng 2008; Henry 2008). This perception is heavily linked with the ‘customer is king’ principle in marketing where a firm’s strategy is guided by the needs, tastes and preferences of the clients. According to this view, the competitive advantages of the firm are founded on the firm’s ability to understand and respond to the developments in the industry timely and effectively. One of the gurus in management, Michael Porter developed the five forces analytical tool to assess a firm’s industry/market based competitive advantages. This approach is categorised as outside-in approach given that the strategy first assesses the external environment before seeking to change the internal environment of the firm (Henry 2008). The industry based view gives weight to competitors and consumer preferences. According to Henry (2008), players in any given industry, whether new or existing, must recognise the influence of competitors on their own strategy. A number of authors cite the domination of the global auto-manufacturing industry by Toyota which has influenced how other auto makers develop their strategies and position themselves in the market (Moon, 2009; Ireland, Hoskinsson, & Hitt 2008; Peng, 2008). Henry (2008) writes that in most cases, new entrants in the market either seek to create a new niche market or snatch away part of their competitors’ market. In light of this, it is paramount to note that the position of competitors and other players in the industry is dependent on other factors such as their capabilities and resources. This therefore makes the industry based view complementary to the resource based view of the firm. The industry based approach has its shortcomings too. Henry (2008) cites Colins and Montegomery (2002) who say that one disadvantage of industry based view is that managers tend to blame competition for poor performance of their firms rather than encourage internal evaluation to find out the cause of underperformance in a firm. The desire for success in also pegged on the failure of competitors which is wrong because competition fuels innovation and creativity. Peng (2008) says that some firms operate in very diverse industries making it hand to consider all the sub-industries in strategy formulation. Furthermore, this approach treats an industry as homogenous with clear identification of participants which is not practical because small numerous industries interact to form a larger industry. Institution based view The institution based view of strategy focuses on the rules, both formal and informal, that apply to firm that is seeking to explore a foreign market (Jansson 2008). This view is founded on the assumption that the legal business environment varies from one country to another. As such, firms seeking to enter a foreign market must first learn the rules of the game in that new market and adhere to them. Peng (2008) says that the greatest variation is in the informal rules which are largely guided by culture and social developments. He cautions multinational firms to be keen on the informal rules as they are the greatest hindrance to international expansion and success in new foreign markets. Nonetheless, the formal rules such as antidumping laws have also have a great bearing on MNC’s international strategy. For instance, majority of Chinese MNCs use the low pricing strategy to compete on the international market while some countries prohibit such firms from operating or exporting in their domestic markets through the antidumping law. Jetstar has experienced growth in its five years of operation. In the 2009 financial year, the company’s passenger revenue grew by a whooping 21% while its international capacity grew by 50% (Qantas Annual report 2011). Despite this growth in the capacity in international operation, the domestic operations were larger at 53% compared to international operations at 47% (Appendix A.). Its revenues also grew by 8.8% to stand $1.9 billion in the same period (Qantas Annual report 2011). Such phenomenal growth makes the firm a viable player in the Chinese market, but these figures are not enough. Peng, Wang and Jiang (2004), among other authors come out strongly to say that an international business strategy is incomplete if it does utilize all the three views of international business strategy. The importance in using this three pronged approach is cemented by the fact that emerging and developing economies such as China and India are experimenting with new institutions and their political and social cultural structures are poorly understood by the western world where majority of the MNC’s keen to explore the Chinese market are located. Meyer (2004) thus recommends that MNC’s should be vey attentive to details in the institutions and industry dynamics when exploring these non western markets because the differences are particularly large. Considerations for Jetstar’s IB strategy Porter’s five forces analysis As aforementioned, the Porter’s five forces analysis captures the position of the firm in the industry that will determine the type of international business strategy adopted in the case of expanding to China. This analytical tool uses the industry/market perspective to assess factors that maybe relevant to a firm in entering a new market, in this case Jetstar’s entry in China. Buyers bargaining power The buyers in this case are the creators of demand in the industry and the most important to the firm. They have the ability to influence the prices of the services from Jetstar. In this case, buyers wield considerably little power over Jetstar because the firm is marketed as a low priced air travel provider hence consumers are already aware that prices cannot drop any lower. Again, the service is not standardised because there are other premium air operators who target another market altogether. These buyers are not organised into dominant groups hence they cannot bargain collectively. Bargaining power of suppliers Suppliers for Jetstar include aircraft manufacturers, jet fuel marketers among others. The aircraft suppliers wield immense power over Jetstar as there are few dominant suppliers globally whose credibility is hinged on safety and performance amongst other considerations. Some aircraft suppliers in China have threatened to integrate forward in the industry by supplying charter flights which further increases the supplier’s power. Jetstar is favoured by growing popularity of the low cost air travel market which has spurred demand from higher capacity and fuel efficient carriers which reduces the power of the suppliers. Threat of substitutes There are numerous possible substitutes for air travel such as road, rail and water. However, there is a high cost of substitution especially safety costs. Air travel is the safest and also the fastest and most convenient for transport over long distances. The growth in the low budget air travel market indicates that consumers are ready to bear the substitution cost. Jetstar’s low priced air travel service is however easily substitutable with other low-priced fliers operating in China and the Asia-pacific region. Threat of new entrants The industry has no natural barriers. However, the high value investments required locks out many potential new entrants in the market. Government regulations through issuance of permits and operating licenses also limit the number of new entrants in the air travel industry. The domination of the industry by a few players who have formed cartels and alliances also locks out small players (Evans 2001). Competitive rivalry The industry is not monopolised but is competitive. The operators have formed sort of cartels under international organizations to aid in their operations. Other than pricing, players have included value added services to their clients and also segmented the market. Industry-based considerations Opportunities and threats The Chinese economy has recorded rampant GDP growth in the last several years to put it as a contending global economy. During the recent global financial crisis, China was one of the few economies that recorded positive GDP growth. Positive economic growth boosts the purchasing power of individuals a fact supported by the emergence of medium income society. In 2008, per capita GDP was $6 200 which grew to $6 800 in 2009 and has been an upward trend (Indexmundi, 2011). Threats There is fierce competition from domestic and regional players. The liberalisation of the Chinese aviation industry has opened up the industry to new players. Existing players with a long presence and experience in the industry have managed to cultivate customer loyalty over time making it hard for new players to penetrate the market. Strengths Jetstar as international brand is associated with low prices and efficiency in air travel. This kind of recognition gives the company stronger brand attractiveness than its competitors. Again, the association of Jetstar with Qantas airlines boosts the brand recognition and brand loyalty. As a subsidiary of Qantas, Jetstar enjoys the quality flying heritage from one of the most recognised airline brands in the world. As a relatively new brand in the market, Jetstar is associated with innovation and creativity in service delivery backed by a fleet of modern aircraft. Jeststar has a committed workforce that has been instrumental in the company success as noted by the group chairman Leigh Clifford (Annual report 2011). Weaknesses The brand does not stand alone as it is viewed as a front for Qantas airlines hence consumers might question the ‘low budget price’ aspect since the Qantas brand is not associated with that. The firm has very little control over its costs especially given the recent surge in global fuel prices. Pestle Political China is a communist state. The government is headed by president. The current president is President Hu Jintao. His administration has enjoyed political stability for a long period and is largely credited with the country’s good economic run (DFAT 2011). The government influences the economy through formulation of monetary and fiscal tools. Again, the government is responsible for attracting FDI through subsidies to new foreign businesses and tax waivers (DFAT 2011). A stable political climate allows undisturbed business activities such as distribution. Again, a stable political climate boosts consumer and investor confidence especially under a regime that shows good governance. Positive GDP growth rate implies that consumer purchasing power is growing and that the consumers are optimistic about the future. Economic Environment The Peoples' Bank of China Monetary Policy Committee set the benchmark interest rate at 6.31%, inflation at 4.9%, GDP growth at 9.8% and unemployment rate at 4.1%. As of April, the interest rate stood at 6.31% with the exchange to the US dollar at 6.54 (Trading economics 2011). An appreciated currency makes exporting to China expensive. The high interest rates make loans expensive. High inflation rate reduce consumer purchasing power. Although China is labeled as a communist economy, it practically follows a mixed economy structure where there is market regulation through regulatory bodies and a laissez fairez policy where market forces control demand and supply. Legal Environment There are 14 types of taxes applicable to all foreign investments and businesses in China. Among these are Value Added Tax, Consumption Tax, Business Tax, Income Tax on Enterprises with Foreign Investment and Foreign Enterprises, Individual Income Tax and Resource Tax (Chu 2011). The labour laws vary widely from state to state. However, the federal government is responsible for handling all labour complains from organisations or individuals. Gradient says that employees hold a relatively weak position vis-à-vis their employer. This explains why many firms operating in china are accused of abusing their employees. Jetstar has the opportunity to establish itself as an equal opportunities and fair employer in the labour market. There is no limit to the amount of profits that foreign owned subsidiaries can remit back to their home countries unlike other countries which have placed limits. Social cultural environment china The Chinese market comprises of over a billion people. The Hofstede cultural dimensions capture the social cultural impact of the Chinese market on Jetstar operations in the country. On time orientation, China scores highly at 118 on time orientation. This indicates that the Chinese people, same as their fellow Asians value their culture very much something that Jestsar must be prepared to observe. On the individualism vs collectivism dimension, China ranks 20, lower than its Asian counterparts ranking 24. The high collectivism and togetherness nature is strengthened by culture and communism which breeds loyalty. This implies that Jetstar might have problems penetrating the market as consumers remain loyal to local and already established players or the market dominant brands. China has a high rank of power distance at 80 compared to a global average of 55 and a Far East average of 60. This is indicative of high levels of inequality which Jetstar must be willing to respond to. Despite this, China is viewed as feminine on Hofstedes parameters as the people depict a modest and caring nature in both sexes. China is also ranked high at 72 on uncertainty avoidance. Such people tend to be driven by inner nervous energy and expectant of strict regulations and structures to guide operations. Technological China has registered impressive technological growth especially in urban areas. The rural areas remain relatively undeveloped technologically being home to peasant farmers. High penetration and use of the internet has facilitated growth of e-commerce and particularly the air travel industry taking to online booking and payment of air travels. The government has opened many regions and provinces through international and domestic airports, railway lines and seaports. Ecological The country scores poorly on environmental issues. Globally, it is the second in greenhouse gases emission after the US. Nonetheless, the government is seeking to control this through environmental laws. Players in the country are also subject to environmental international law given that China is a signatory of the Kyoto protocol on environmental protection. Recommendations Jetstar should consider offering international flights to China only and not domestic flights. The High level of uncertainty avoidance in the county indicates that misinformation about the west and foreigners in general will be evident in the choice of products and services that consumers will desire to consume. By consuming local services and products, Chinese people will be sticking to products that they are widely accepted by the local through collective behaviour. Nonetheless, as an international business hub, controlling 6% of the global trade (DFAT, 2011), China has high traffic on business people in and out of the country a market segment that Jetstar should target. It is recommended that Jetstar clearly identifies various business processes and assess how much their re strengthened by the firm’s resources and capabilities, the industry in China and the institutions governing the industry in a value chain analysis format. This will avoid aggregation of performance which impacts on international strategy. As aforementioned by Ray, Barney and Muhanna (2004), firms should tie specific resources and capabilities to certain business processes which can also be extended to industry developments and institutions relevant to the industry. If Jetstar is interested in exploring the domestic market, a Chinese subsidiary should be formed that is capable of responding more accurately to the Chinese culture which strong advocates for collective loyalty to Chinese brands as part of their culture and collectivism philosophy shown by the Hofstede cultural dimensions. A Chinese subsidiary operating in china will be capable of communicating in local languages with the people and present the marketing message more clearly and address the high uncertainty avoidance index. References Chu, P. (2011). Foreign investment taxation of China. Retrieved from, http://www.chinalawfirms.cn/practice-areas/corporate/tax/610-foreign-investment-taxation-of-china.html Evans N. (2001). “Collaborative strategy: an analysis of the changing world of international airline alliances.” Tourism management. 22(3), 229-243 Foreign investment taxation in china. (2011). Retrieved from, http://www.chinalawfirms.cn/practice-areas/corporate/tax/610-foreign-investment-taxation-of-china.html Gradient, N. (2011). Labour law. Retrieved from, http://www.eycom.ch/publications/items/china/legal_labor_law_20051016/en.pdf Henry, A. (2008). Understanding Strategic Management. London: Oxford university press Hofstede, G. (2011). Cultural dimensions on China. Retrieved from, http://www.geert-hofstede.com/hofstede_china.shtml Ireland, R., Hoskisson, R., Hitt, M. (2009). Strategic management: competitiveness and globalization : concepts & cases 8th ed. Brisbane: Cengage Learning Jansson, H. (2008). International Business Strategy in Emerging Country Markets: The Institutional Network Approach. Sydney: El Publishing, Jetstar website (2011). Retrieved from, http://www.jetstar.com/ Jiang, H., Doukas, L. & Liu, X. (2002). Internet Economy and Chinese Airline Industry. Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia (ACESA). Mclvor, R. (2010). Global Services Outsourcing. New York: Cambridge University Press Meyer, K. E. (2004) ‘Perspectives on multinational enterprises in emerging economies’, Journal of International Business Studies 35: 259-276. Moon, H. (2009). Global Business Strategy: Asian Perspective. London: World Scientific Peng, M. (2008). Global strategy. London: Cengage Learning Qantas, annual report 2010. The sum of us. Retrieved from, http://www.qantas.com.au/ Lo, V. & Tian, X. (2009). Law for Foreign Business and Investment in China. London: Taylor & Francis Peng, M., Wang, D. & Jiang, Y. (2004). “An institution-based view of international business strategy: a focus on emerging economies” Journal of International Business Studies. 39(2), 920–936 Trading economics. China interest rate. Retrieved from, http://www.tradingeconomics.com/Economics/Interest-Rate.aspx?Symbol=CNY Qantas website 2011. Retrieved from, http://www.qantas.com.au/ Ray, G., Barney, J. Muhanna, W. (2004). “Capabilities, business processes, and competitive advantage: choosing the dependent variable in empirical tests of the resource-based view.” Strategic Management Journal, 25: 23–37 Verbeke, A. (2009). International Business Strategy: Rethinking the Foundations of Global Corporate Success. New York: Cambridge University Press Appendix / Source: http://annualreport.qantas.com.au/jetstar/ Read More