Strategic Management of Delta Airlines - Research Paper Example

31 July 2007 Strategic Management Delta Airlines is the main American carrier that operates both domestically and internationally. Since the terrorist attacks of 9/11, airline industry was one of the profitable industries in the world marked by rapid technological and marketing changes, and competitive environment. The macro- and micro- environment affects not only an organization in an industry, but also the whole industry itself. PEST helps to analyze external drivers that have a great impact on performance of Delta Airlines. Before 9/11 Delta Airlines was influenced by strong legislation and stable economic situation in the region which allows it to sustain competitive market position. Stable political situation in America and economic relations with Europe supported development and growth of international operations. Government policies and employment law have a positive impact on company's performance, its market position and organizational structure. Economic factors included stable economic development of the region, low interest rates and low inflation rates; regional and international cooperation, high record of airline industry growth. Social/demographic included lifestyle changes (involve aging of population), and increasing number of travelers. Technological forces generate problem-solving inventions. Airline target was on average as dependent on reliable information technology as any other businesses. Improvements in cargo ships and handling equipment, increasing containerization, applications of IT to scheduling and controlling shipments and to customs procedures, new plains, and a host of other technological advances and innovations have reduced the costs of services and information. On the other hand, airline technology cost is one of the highest among other industries (Rinehart, 2005; Meyer 2003). After 9/11 Delta Airlines experienced profit loss and lost it market share. Political situation did not change greatly including favorable trade regulation (protectionist laws), employment law and trade union policies. Economically, increased fuel prices had a negative impact on Delta Airlines and forced the company to increase prices and reduce number of flights. In social sphere, the events of 11/09 and crashes of Boeing planes occurred this year reduce the attractiveness of airline services. Many potential passengers prefer to use alternative transport even if it takes more time to get to the place of destination. In this case the bargaining power of customers is not crucial. The ultimate aim of customers is to pay the lowest possible price to obtain the services that they require. Events of 9/11 forced many carriers including Delta Airlines invest in security systems and increase safety of airplanes (Meyer 2003; Delta Air Lines 2007). Porter's 5 P's (forces) include: the threat of entry of new competitors; the threat of substitutes; the bargaining power of customers; the bargaining power of suppliers; the degree of rivalry between existing competitors (Porter 45). Before 9/11, new entrants to an industry raised the level of competition, thereby reducing its attractiveness. Competition did not have a great impact on Delta Airlines obtaining a string market position and brand image. The presence of substitute services like trains, ships or automobiles transportation did not influence the industry and the price levels. A source of customers' power was the willingness and ability to achieve backward integration. Supplier power in the airline industry was the converse of buyer power. Suppliers had enough leverage over industry firms, and raised prices high enough to significantly influence the profitability of their organizational customers (Delta Air Lines 2007; Marks 2007). After 9/11, the threat of substitutes and the bargaining power of customers were the main 'drivers' in this industry. Many customers use alternative transport because of safety concerns. The high fuel prices do not allow Delta Airlines to decrease prices and attract wider target audiences. Customers drive down profitability gaining leverage. Terrorist attacks have increased the degree of rivalry between existing competitors (its direct competitor JetBlue Airways, Virgin Express, RyanAir, EasyJet, Southwest). "The low-cost carrier [like Southwest] had managed to survive the majors' competitive wrath by, in the words of one analyst, "running between the legs of the giants." (Marks, 2005), Delta Airlines follows the differentiation strategy based on unquiet brand image and premium services provided for its customers. After terrorist attacks, Delta Airlines has followed two-product strategy. This strategy allows the company to compete against low-price carriers differentiating brand, quality, price and distribution. The differentiation strategy seeks to exploit firm-specific assets by producing goods or services which are almost unique compared to those offered by rivals. Of course, differentiation is not limited in its dimension to the physical nature of the product. Other significant dimensions of differentiation include distribution channels and marketing efforts. Like other carriers, Delta Airlines sales its tickets through travel agents. Essentially, Delta Airlines looks to establish itself as unique within its industry. After 9/11, Delta Airlines tries to change its strategy but fails to compete with low cost carriers. Companies, like Southwest Airlines, achieve and sustain effective differentiation of their products enjoy competitive advantage to an extent which is measured by the gap between the premium price charged and the additional costs incurred to effect the differentiation (Isidore 2005; Delta Air Lines, 2007). Sustaining competitive advantage does require such companies to keep a vigilant watch over those costs which do not contribute to differentiation. Otherwise, its competitive advantage will be eroded, if not eliminated, by a subordinate cost position. Effective differentiation is generally resistant to the forces of competition. Potential and existing rivals must overcome the uniqueness of the product and try to erode customer loyalty. Customers are less likely to switch because of a perceived lack of similar alternatives (Delta Airline News, 2007). The bargaining leverage of suppliers on the factor market side is mitigated by the premium prices associated with differentiation on the product market side. The firm commanding greater customer loyalty is more impervious to the threat of substitutes than other firms within the industry (Delta Air Lines 2007). SWOT Delta Airlines operated on the dynamic market where the main objective was to maintain the high level of service quality and developed strategies to improve their services. Market was usually affected by the factors in this environment often and it was able to have an influence upon it. Before 9/11, the main strength of Delta Airlines was that its services obtained a very competitive position on the global market. The brand had a hard core of loyal supporters which helped the company to .developed lines of services to satisfy the needs of wide audience. Delta Airlines had maintained high-speed growth through continuous optimization of services and technologic. The US market showed the highest rate of economic growth around the world (Delta Airline News, 2007). The opportunities of Delta Airlines included high potential to growth and profitability of the company; promotion to other divisions; increased revenue from success in the US market, a global expansion and penetration into European markets; safety and high service standards. The main threat was deregulation of the industry and operational costs (agent services). The main weakness was seasonality. After 9/11, terrorist attacks and customers prejudice have a great influence on revenue. Today, the main threat for Delta Airlines is raising costs wages and transfer fees (bank interest charges, policing equipment), authority refusing planning permissions, and low market share. The main weakness of Delta Airlines is seasonality, high competition among world leaders and low level of personal consumption. The strength of Delta Airlines is a strong brand image and past success. The opportunities include favorable economic position, opportunities from the Regional Markets and reduced aircraft prices, online sales. An increasing role of unions forces Delta Airlines to spend much cost on labor resources increasing wages and social provisions. High labor cost results in decreasing revenues and profitability of the industry (Meyer, 2003). On the other hand, new technologies and automation allows airlines to decrease prices and improve service quality. "The industry continues to suffer from high taxation, fees and security costs levied by the government and regulatory agencies" (Leveraging Technology, 2005). Diversification Since 2001, Delta Airlines relies on international capacity than on domestic market. Before the terrorist attacks, the main motivation within the company was to 'stay ahead of rivals'. A service was chosen to solve one new problem, which often sufficed to get a toe-hold in a niche market. Then technical developments were built up on this single new feature, at the same time as building up market interest. Delta Airlines followed a focus strategy based on differentiation. The market segments in which Delta Airlines operated were interrelated and facilitated diversification into other segments from an existing market position. The business had grown substantially (Too many seats hurting 2007). Today, the company follows reverse international revenue diversification strategy. Delta's diversification behavior is a function of three sets of factors. One is the specific range of applications to which the company's existing resources may be applied. These determine the feasible set of businesses in which the company's resource base will provide competitive advantage. The second is the extent of transaction costs in the relevant markets for the company's existing resources. These determine the company's ability to exploit its resources through contractual arrangements, which can obviate the need for expansion of the company's boundaries. The third set of factors deal with the sustainability of the competitive advantage provided by the company's resources. It is assumed that a firm cannot act to exploit fully all of its resource potential at once. Given the need for prioritization, Delta tries to focus first on the exploitation of those resources that offer the most sustainable competitive position (Delta Airline News, 2007). Delta Airlines follows outside-in strategy dealing with the environment. This strategy allows the company to place the customer and the market at the core of the strategic campaign. Customers' perceptions of realizable net value are the single most important determinant of long-term performance. A strategy of providing the best net value provides the most sustainable long-term competitive advantage. Thus, value is much more important to customers and managers than previously imagined (Delta Air Lines 2007). With rising consumer expectations and legal requirements for better quality, customers are loyal only as long as the firm provides the best value. For managers, statistically-based value management processes provide the only systematic way to continuously improve relative value (and cost) positions and thus recapture market share. This fundamental shift in the basis of long-term competitive advantage suggests that the strategic management process itself needs to be reexamined. In spite of profit loss, Delta Airlines is an expert and market leader because its marketing challenge is to position service offerings as the high quality, high value-add alternative. Rivalry is fierce because there are several market leaders including Delta Airlines. In general, Delta Airlines is well-positioned to take on this important leadership role. It has the resources and certainly has the technological capability. The market strategy involves brand positioning, market segmentation, and strategic alliances. New competitors may find it difficult to gain access to delivering services, which will make it difficult to provide their service to customers or obtain the inputs required or find markets for their outputs (Delta Air Lines 2007). The main stakeholders of Delta Airlines are employees, business porters, creditors, customers. Delta Airlines is attempting to deal with broad societal concerns (discrimination in the workplace, and the employee "rights" movement). Delta Airlines must increasingly weigh the pros and cons of these issues and adopt the best postures, given the conflicting points of view expressed by key stakeholders (Delta Air Lines 2007). Delta Airlines responds and is willing to live with the consequences, even though correct responses are not always easy to identify. At a broad level, the ethical missteps, the societal responses, and need to be proactive in preventing the ethical issues of organizations require immediate attention and definite courses of actions, which may become the next subject of debate in years to come. In general, current strategy provided by Delta Airlines does not allow the company to compete on the market and increase its market share. The case of Southwest Airlines shows that cost focus competitive strategy focusing on a particular geographic market is the bests solution in fierce market conditions. This helps Southwest to serve only this niche, to the exclusion of others. The cost focus strategy is effective because focuses it helps Southwest to serve its narrow strategic target more efficiently than can its competition. The aim of the company is to maintain the level of service and product quality and develop strategies to improve their product/services. In spite of current crisis, economic analysis shows that Southwest airlines is one of the most successful companies today: "despite deregulation's goal of spurring more competition, the major carriers continued to effectively control the nation's skies and the prices consumers paid" (Marks, 2005). Southwest builds leadership in four fundamental competencies. In the long run, it will derive its competitiveness from its ability to bring high-quality, low-cost products to market faster than its competitors. To do this, Southwest must be viewed as a portfolio of competencies rather than a portfolio of businesses. The concept of distinctive competencies challenges Delta Airlines executives to rethink the concept of the corporation itself. It also could help to redefine the task of management as building both competencies and the administrative means for assembling resources spread across multiple businesses. Southwest increases value by finding ways to cut costs and prices. Customers buy products not for their features, but taking into account perceived value it delivers. Southwest uses different features and functions that focus consumers attention on design. Also, some customers of Southwest buy products considering a product's perceived price. Considerably low cost and high quality of goods help Southwest to add perceived customer value. Also, strong brand image and publicity support the goals of the company in this field. The remarkable feature of Southwest is that it offers a combination of high quality product, distribution and promotion benefits and the lower prices then competitors (Serwer 2004). In sum, the outlook of the airline industry does not present Delta Airlines with attractive perspectives for profitability. Bankruptcy, tight competition and high fuel costs suggest that profitability of the industry is problematic. In spite these facts, strategic analysis shows that Delta Airlines can be one of the most successful carriers. Example of Southwest Airlines could help Delta Airlines to compete on the market and increase its market share. Past success shows the ability of Delta Airlines to use its resources and capabilities to develop a competitive advantage through distinctive competencies shows that it is able to sustain competitive position. Works Cited 1. Delta Air Lines. 2007. 2. Delta Airline News. 2007. 3. Isidore, Ch. Delta Air Lines files for bankruptcy. 4. Leveraging Technology To Save Airlines Money. 2005. 2007 5. Marks, A. Airline industry is poised for shakeout. 2007. 6. Meyer, J. Labor and the Airline Crisis. 2003. 7. Porter M.E. Competitive Advantage. New York, Free Press, 1985. 8. Rinehart, S. Delta Airlines from 1988 to Present. September 30, 2005. 9. Serwer, A. Southwest Airlines: The Hottest Thing in the Sky. 2004. 2007 10. Too many seats hurting the airline industry 2007. Read More