Strategic Management in Airline Industry - Essay Example

Strategic Management Analyse and discuss the attractiveness of SAS Group's environment (industry) Airlines industry is the kind of industry whichrequires huge investments yet the level of competition is such that airlines often keep investing for years together and keep waiting for break even. The industry is investment intensive from the beginning, and requires continuous replenishment throughout the operational activities as well. Fuel costs, addressing the security concerns, maintaining well-paid pleasing personalities on the rolls for various types of services, preparing attractive promotional campaigns, inviting newer customers with loads of discounts, having a decent office and staff etc. some of the recurring costs that an airlines industry requires to survive. The airlines industry is a complex one. Therefore, the industry is attractive as such but with the kind of investment required in carrying out the business, it is very difficult for new entrants to challenge the existing players, as is the norm is many other sectors like retail, IT services etc. Deregulation of market in EU did open up the field for new entrants, but the developments that followed have firmly established the high levels of competition prevailing in the industry. The Scandinavian Airline Systems (SAS) group is an established player in the sector, with over 60 years of experience in the sector. SAS group is also one of the founder members of the Star Alliance. Formed in 1997, the Star Alliance of a number of leading players in the aviation sector is an effort towards consolidating the respective positions of the airlines in such a manner that competing companies do not end up working at cross purposes. The airlines industry is a high risk industry as well. Particularly after the onslaught of SARS virus and 9/11 events, the airline companies are required to be doubly careful in handling the security matters, installing safety features, recruiting new people etc. The onset of low cost airlines has further made the field competitive while squeezing the profit margins. As a result of decreasing profit margins and the growing realisation of the need to consolidate their positions, a major trend within the global airlines industry has been for companies to seek strategic alliances with other airlines and benefit from synergies in operations. The Star alliance is a good example of such a realisation. The growing competition has proved to be a boon for the travellers actually. With airline companies trying all out efforts to woo the customer, the number of alternatives for the customer have actually increased. This has led to increased emphasis on improving the quality of services being offered to the customer. Providing quality on board services, perfect baggage handling, adhering to the timeline i.e. punctuality, presenting pleasing faces during customer handling etc. are some of the benchmarks for the airline companies. The fact that SAS has been declared as Europe's most punctual scheduled airlines during the past six months points out the emphasis being placed by SAS in making the journey comfortable for its customers. Such measures are in fact are a prerequisite not only for maintaining a decent level of profitability but even for survival in the industry. The closure of airlines like Hong Kong's 'Oasis', after just about 18 months of its launch1 or that of another Low-cost US carrier Skybus Airlines within less than a year of its start off are an indication of the cut-throat competition prevailing within the industry. It is worthwhile here to mention that the recessionary trend started off with the US sub-prime mortgage crisis is also making the life difficult for the airline industry. ATA, Aloha, American, Southwest, Delta etc. are some of the names which have been facing the pinch. In order to survive in the industry some airlines are also resorting to mergers and acquisitions. Merger of Delta Airlines and Northwest airlines2, 2. Identify, analyse and discuss SAS's group unique resources and competences, their profitability and how they can be further developed. SAS group's unique resources and competencies include; i. A well established brand identity: Brand equity plays an important role in convincing people to go for the product and services actually. In the service sector, when number of alternatives increase, this is particularly crucial for attracting new customers and retaining the existing ones. ii. Strong Competitive Position: SAS group has been able to maintain a substantial advantage as compared to some of its competitors owing to its consistent emphasis on quality and value addition to its services. iii. Good Networking: SAS group connects to a number of destinations around the world. In Scandinavia the airline is shouldering a special kind responsibility of connecting the distance location in Denmark, Norway and Sweden with the main cities like Copenhagen, Oslo and Stockholm. Being a Full Service Provider (FSP), SAS connects Europe with Asia, Americas etc. iv. Alliance with reputed carriers: SAS is having strategic alliance with a number of reputed international carriers. This provides the company with a strategic edge in handling the international traffic and serving even those routes where the company's own fleet doesn't have a presence. The Star Alliance was formed in 1997 as the first global airline alliance with a customer base spread to different regions of the world. With more than 16,500 daily flights to 912 destinations in 159 countries3, such an alliance was meant for a smoother travel experience for the customer. v. Being Viewed as a national symbol: In the Scandinavian region SAS is considered a national symbol. This implies the importance being attached to the carrier and also helps in organising a number of facilities from different government agencies. vi. Diversity of services being offered by the SAS group: SAS not only offers air travel services but the group also offers functional services like SAS Ground Service, SAS Technical Service and SAS Cargo. This provides the company a leverage in taking benefits of the economies of scale and offsetting the losses from one set of operations to another. vii. Well Organised structure holding a number of subsidiary companies: SAS group has been able to function in a professional manner. The top management constantly keeps track of the functioning and requirements of the daughter companies. Owing to the recessionary trend and stiff competition in the aviation sector SAS too has not been able to maintain the growth story of previous years. But it needs to be emphasised here that despite a dip in the number of passengers by 5.4% in the third quarter of 2008, the company was able to register operating revenue figures of MSEK 16,365 which is about 0.4% higher than the previous quarter4. The stock markets are in for a downward journey all over the world, led by the Wall Street. This has also led to a dip in the market cap of the company. 3. Suggest and discuss an appropriate competitive strategy for the SAS Group and how this strategy can be defended. Today globalisation and liberalisation have become de-facto norms of any economy. This calls for a strategy which not only helps in boosting the prospects of the company but also helps the customers in making an intelligent choice. With more low cost airlines dotting the airspace, the industry is further reaching towards saturation. Brand name, Quality, Value addition coupled with effective marketing strategy play key roles in taking the competition head on. It has been observed that frequent flier point programmes also play a role in the Airline industry5. An airline with a strong brand name and incentives can usually be enough to lure a customer (even if their prices are somewhat on the higher side). The airline also need to plan out strategies in such a manner that frequent fliers and loyal customers feel being valued by the carrier. Market segmentation is therefore to be carried out for effective management of customer relationship. Depending upon the business situation, the most effective segmentation strategy may need to integrate a range of factors depending upon market demographics, needs, behaviours, beliefs and attitudes. Moss (2007) points out the determinants of an effective customer relationship management for an airliner as; Identifying customer-related business challenges across the company Painting accurate pictures of customer types across the company, even if the customers are screamers - Be honest. Assessing the corporation's culture - Is it product-focused or customer-focused Assessing various business units within the corporation and determine if the business model operates as a product-focused portfolio or as a customer-focused portfolio. Walking a mile in customers' shoes to get an honest appraisal of the gaps between their expectations and what is being delivered. Creating the qualifications for executive sponsorship candidates Obtaining agreement on the CRM definition and objectives across the organization Identifying desired short- and long-term benefits Determining how a solid CRM strategy positively impacts the corporation and individual product portfolios. Identifying the good, the bad and the ugly business processes Evaluating data sources across the enterprise, identifying any integration gaps and data repository duplications. Determining the CRM priorities for operational, analytical, data collaboration and distribution SAS appears to be taking good care of its customers with a variety of measures including an attractive frequent flier program, which includes the Star Alliance partners as well. The company can do still better with measures like; Strengthening its Frequent Flyer Programs: This is one of the tried and tested program which helps in providing some loyalty bargains to the customers who prefer to make use of the airliner most often. Almost all of the full service airliners and many of the low service airliners have launched such programs and such programs have indeed proved to be attractive for the loyal customers, who get good bargains with more air-travels RFID Baggage Tags: Radio Frequency Identification (RFID) baggage tag is the new application of technology for identifying, tracking and tracing the baggage of any passenger, after it reaches the airport at check-in. Though the baggage loss cases are few and far in between for SAS, but even a small percentage of lost baggage results in huge financial and man-hour loss for the airlines. In addition, the delay in tracing the baggage also results in frustrating the customer. Travel Planning: SAS can help the customers in planning their travel schedule, tie-up with other concerned agencies in order to put the customers at ease during their holiday or business trips. This includes local sightseeing, pick up and drop facilities, arranging guides, hotel planning etc. 4. Suggest and discuss an appropriate growth/survival strategy for the SAS Group SAS is indeed facing quite a few challenging circumstances as far as survival and appropriate growth in these turbulent times are concerned. Industry analysts have expressed the opinion in the recent past that SAS could survive if some bigger companies acquire it, but for that the governments of Sweden, Norway and Denmark are to agree on the finer points. But till that happens the company has to survive in such a manner that its customers as well as its employees feel motivated enough to lend a helping hand to the company. Taking good care of the customers forms the key to a success story in the airlines industry. Therefore customer relationship management (CRM) part need to be taken good care of by the company. With influential writers like Kotler (1992) stating that companies "must" move from a short-term transaction orientated goal to a long-term relationship-building goal, customer relationship management has already entered into the "rhetoric" of management. Taking a look at the airlines industry in general and SAS in particular porters' five forces diagram can be drawn, as follows; Porters Five Forces for SAS- It is therefore quite clear that apart from the threat of competitive rivalry the bargaining power of customers can make the maximum difference as far as growth and survival of SAS is concerned. Therefore, for a long term survival SAS is also required to invest in Customer Relationship Management (CRM) systems and technologies in order to increase and improve customer engagement and communication. Effective customer messages must have the following elements: Differentiation: The message must convey a brand promise that differentiates the company's products and services from its competitors. This promise must include an emotional component for the customer to understand. Excitement and Activation: The communication must be able to convey a compelling message that overcomes the consumer inertia, perceived risk, and "switching cost" barriers Connect: It must establish, re-establish or reinforce an emotional connection with target customers to serve as the foundation for an enduring customer relationship. 5. Identify and discuss the different economic perspectives behind the above elements of strategic management. For instance you can discuss how the economic perspectives differ in their assumptions concerning actors, rationality, economic value creation and organizations and how organizations develop. In general the strategic management process begins by taking stock of the strengths and weaknesses of the company, together with opportunities in emerging markets and threats from alternatives products and competitors. Subsequently, the market dynamics are taken into account to synchronise the plans with the requirements. Strategic management planning, in general, is carried out by the top management, with strategic inputs from different departments. Porter's value chain (1985) provides an important tool for developing and sustaining competitive advantage for a company. It underlines the need for creating and retaining value for the organisation and all its stakeholders. The key elements of strategic management include; Managing the expectations and purposes of stakeholders: For an airline the main stakeholders happen to be the travel agents, the shareholders, the suppliers, the employees, the government, the customers etc. At times it appears that on some of the issues the interests of two of more stakeholders comes in confrontation with each other. For example, while the shareholder would like the profits to be re-invested into the company's business, so that the company sees rapid growth and the share prices goes up; the travel agent would like the carrier to distribute the profits as much as possible with the partners. It is at such juncture that the airlines is supposed to make strategic moves in order to come upto to the expectations of the stakeholders. The airline is supposed to adopt a balanced approach depending upon the prevailing market conditions. Managing the Resources: Financial resources, Physical resources and Human resources are the one's which often help an organisation to chart out the course of journey. While banks, financial institutions, shareholders, partners prove helpful for financial resources the workforce proves to be an important resource for the company as well. Therefore, the carrier will have to see not only the economic interest of managing these resources, but the behavioural aspect as well. In addition there are a number of intangible resources like goodwill, brand equity or reputation, which require to be preserved and upgraded with more investments. Selecting and prioritising the strategic options: Often a company is supposed to come out with a number of alternative courses of action with futuristic projections of their implications. Prioritising such options plays a key role in the strategic management. Preparing the organisation for the implementation of strategies: Once a course of action has been finalised for implementation from amongst a number of alternatives, then comes the strategy to prepare the organisation and its stakeholders for the implementation process. Implementing change: It is said that change is always resisted, but a lot depends upon how the company prepares all stakeholders for the impending change. For example, in these times of recession, many a companies have averted serious worker unrest by negotiating some salary cuts, leaves for the employees etc. Such smooth transition helps the company in successfully making way for the next step. PESTEL is another tool to assess the conditions prevailing around the company which tend to impact its business prospects. PEST analysis A number of factors influence any company, a sector or the overall business environment. For example the HR policies, the technology being used by the company, the industrial disputes law etc all determine the business environment. To analyze the macro-environment the industry has been making use of PESTEL analysis. PESTEL includes Political forces, Economic forces, Socio-cultural forces, Technological forces, Economic and Legal aspects affecting the business environment. For the civil aerospace market and the aircraft construction industry in general, PEST factors include; Political: Today the world is indeed divided into many political arenas on the basis of issues like fundamentalism, terrorism, oil exploration, nuclear power etc. The airline industry is the kind of industry where governments of respective nations are in any case involved with the regulations, deals and negotiations etc. Therefore, the political equations definitely affect the aviation sector in the country. For example, EU nations will prefer European airlines while U.S. and its allies will prefer to go for Delta, American airlines etc. Economic: The economic policies being pursued by the government also determines the aviation sector. For example, if the country has an open economic policy, pursuing the globalisation and liberalization policies, that indicates more and frequent business air travels, which in turn bodes well for the aviation market. This implies an increased paying capacity of the business traveller in lieu of a comfortable journey. This will in turn encourage the airline companies to go for better facilities, more advanced aircrafts with newer features. Socio-cultural: The society in general has a big influence on any business and the airlines industry is not an exception. For example, the airline companies operating in the gulf and Middle East region operate to full capacity during the Hajj pilgrimage season. Similarly, if the per capita income of the citizens happens to be good enough, that implies more paying capacity of the people, which in turn encourages the airline companies to go for frequent trips and full capacity utilisation. This affects the aviation industry in a positive manner. Technological: Impact of technology can be seen in almost all walks of life today. 21st century in particular is dominated by the technology. Aviation sector and the companies in this field being in a technology intensive business are very much affected by the advancements in technology. Legal: The legal framework in dealing with customers, unions, suppliers and other companies affect the business environment. For companies like SAS who have had to resort in tough negotiations with unions in the recent past this aspect makes the business environment all the more competitive. Environment: Now a days concerns about green technologies, corporate social responsibility etc. have become integral components of companies. The expenditure on this count certainly affects the profitability of a company. References: 1. Johnson, Gary; Scholes, Kevan and Whittington, Richard (2008). Exploring Corporate Strategy. 8th edition, Publisher: Prentice Hall 2. Kotler, P. (1992), "It's time for total marketing", Business Week Advance Executive Brief, 2. 3. Moss, Amy (2007). 'Saving the Relationship'. Ascend, Issue-1, 2007. Available online at http://www.sabreairlinesolutions.com/ascend/issues/ascend_2007_issue1.pdf (Jan 3, 2009) 4. Porter, M. (1985). Competitive Advantage: Creating and Sustaining Superior Performance. Free Press, New York. 5. SAS (2009). Available online at http://www.sasgroup.net/SASGroup/default.asp (Jan 3, 2009) 6. Star Alliance (2009). 'The Way the Earth Connects'. Available online at http://www.staralliance.com/en/travellers/index.html (Jan 3, 2009) 7. The Economist (2008). Airline mergers-Trouble in the air. Available online at http://www.economist.com/business/displaystory.cfmstory_id=11058463 (Jan 3, 2009) 8. Thaindian News (2008). 30,000 passengers hit by Hong Kong airline closure. Available online at http://www.thaindian.com/newsportal/world-news/30000-passengers-hit-by-hong-kong-airline-closure_10036305.html (Jan 1, 2009) Read More