Collaborative Commerce Application in the Travel Industry - Article Example

Collaborative Commerce Application in the Travel Industry Bus 4200: Enterprise Information System Management Dr. Rod Heisterberg Problem Statement What is the effect of the Five Forces Model on the viability of the travel/tourism industry? How can Porter’s model help us understand this industry? Challenge/Opportunity Tourism is a dynamic industry and in a constant state of change. Airlines are an important sub-sector of this industry and play an essential role in the global tourist market. Seeking to understand the applicability of Porter’s Five Forces model to the airline industry, an important subset of the global travel and tourism industry, we begin now with a concise overview of this important theoretical model for strategic management. The Five Forces model is based on the following key concepts: 1) the threat of substitute products; 2) the threat of new competitors; 3) the intensity of competitor rivalry; 4) the bargaining power of customers and finally, 5) the bargaining power of suppliers. We now provide a brief overview of each key force and will apply our analysis to the airline industry in the late twentieth/early twenty-first century. The threat of substitute products (1) refers to the close, competitive nature of similar products. Thus, the airline industry in one in which the products are nearly identical (flights from point A to point B) but the airlines try to differentiate one another through the services that they offer. Examples of this would be an onboard meal, a free checked bag or in-flight entertainment. The threat of new competitions (2) refers to the barriers and impediments which exist with respect to the entry of new competitors. Profitable businesses attract many new companies but in order to remain profitable, the industry must limit the entry of new competitors. As we shall see in our analysis of the deregulation of the American airline industry in the late 1970s, the opposite occurred. Porter’s Third Force explores the intensity of competitor rivalry (3) such as between Delta and American Airlines while Fourth Force the bargaining power of consumers (4). This is particularly relevant today in light of the numerous no-frills start-up airlines such as Ryan Air in the UK which give consumers more choice, and hence more bargaining power when purchasing a ticket. Finally, the bargaining power of suppliers (5) is particularly relevant and a considerable portion of this research paper will be devoted to the ramifications of rising oil costs on the profitability of airlines today. Our analysis now turns to a holistic overview of threat of new competitions (2) and the bargaining power of suppliers (5) as they have affected and continue to affect the global airline industry (Porter, 1979). In the context of the United States, the deregulation of the airline industry set the stage for the complete transformation of the American airline industry. This brought the threat of new competitors to the fore with dramatic ramifications on the airline industry. Accordingly in 1978, US President Jimmy Carter signed the Airline Deregulation Act, a United States federal law which paved the way for major changes to the airline industry in the United States in the following decade. Accordingly, this law aimed to remove governmental control over the price of fares, the routes available and the entry of new airlines into the market of commercial aviation. The deregulation of the American airline industry was at the time perhaps the most important, yet undervalued, change ever to impact airlines in America. The deregulation of the industry loosed governmental controls over a variety of aspects associated with domestic as well as international travel and set the stage for three important changes within the industry. Accordingly, “the competition within the established industry was intensified by three innovations pioneered by the major carriers in the early 1980s that collectively represent a change from the regulated era” (Wensveen, 2007). These changes were dramatic and began with the establishment of what was called a “hub-and-spoke” route structure. This route structure represented an innovation in the ways in which airlines operate and was designed to funnel traffic from outlying regions to major “hub” destinations. Accordingly, major “hubs” such as New York, Los Angeles, Miami, and Philadelphia for US Airways sprung up and developed an importance presence in the global airline industry. Accordingly, the establishment of these “hub-and-spoke” route structures proved to be costly but they were an important change brought about following the deregulation of the airline industry. As mentioned above, the threat of substitute products (1) refers to the close, competitive nature of similar products. Airlines now tackle this problem through the establishment of frequent-flier programs, created to enhance brand loyalty. These programs proved to be expensive to maintain but deemed essential in an era of unregulated market competition. The third and final major innovation brought about in the wake of deregulation was the establishment of sophisticated reservation systems which sought systematize the way that travel, fare and information was made available. By computerizing the reservation process and systematizing an intricate system to hold reservations, the airlines integrated the travel agent subset of the industry and embarked upon a major overhaul of the reservation process. Thus, as competition increased as a result of governmental deregulation in the early 1980s, a variety of changes and innovations were underway in the American airline industry. This industry is constantly in a state of evolution and development; now that we have explored the three major innovations of the 1980s, we now turn to a strong overview of the future of the airline industry with an emphasis on the challenges it faces in the next 10 years and the means through which it can overcome these challenges. We now turn to an overview of the bargaining power of suppliers (5) and the ramifications of rising oil costs on airlines. Management Solution Some industries, including the airline industry, are particularly susceptible to global fluctuations in the price of oil and have faced numerous challenges in the age of high oil prices. Transportation relies on oil and oil remains the literal fuel of the airline industry. As a sub-sector of the global tourist market, how has the airline industry responded to the trend of unpredictable oil prices? In addition to asking what has been done to date, we ask how can the airline industry look to the future and deal with the future unpredictability of the oil price of oil? What steps that the industry can take to ensure that it can cope with the erratic price of oil? Seeking to be descriptive and by offering solutions in a prescriptive manner, the following seeks to address the questions surrounding rising oil prices and the airline industry. Data will be compiled from the past two years and analyzed with an eye to how the airline industry can respond to this important threat to its very existence (Douganis 2002; Hill 1998; Jenkins 1998). How has oil production and the price of oil fluctuated over the past few decades? The following graph explores this question with an eye to pricing and production by the world’s largest and most important cartel, OPEC. WTRG Economics 2007 As the graph shows, between 1990 and 2007 OPEC oil production has fluctuated from a low of approximately 23,800 thousand barrels of oil per day in 1990 to a high of almost 32,000 thousand barrels of oil per day sixteen years later in 2006. Despite a fairly steady trajectory of upward growth in oil production for the countries of OPEC over the past decade and a half, the price of oil has fluctuated dramatically. Accordingly, the price of oil reached a high of nearly $69 dollars a barrel in 2006 and remained high at almost $65 a barrel in 2007, a more than 300% increase from approximately $20 a barrel in 1990. In the middle of this past year, oil prices hovered around the $100 mark: the highest ever recorded. As the world becomes smaller and globalization becomes a feature of our daily lives, demand for oil increases and has been steadily increasing over the past twenty years. In line with the increases in demand, the price of oil has also increased over this period, sometimes sharply and almost always in an unpredictable fashion. The ramifications of these sharp increases in the average cost of oil hurt commuters at the pump, consumers who rely on international trade for their goods and service providers such as airlines who basically sell transportation and the ability to get people from point A to point B. Management must understand the problems associated with the volatile oil market and the challenges when an industry is wholly dependent on oil to sustain itself. Lesson Learned/ Business Case Rising oil prices have challenged the viability of the airline industry as the price of oil has gone up and up and up. Although not as high as it has been in recent memory, Bloomberg Media reports that the price of a barrel of crude oil today (November 29th 2008) sells for approximately $55 a barrel (Bloomberg 2008). At the height of the crisis speculation ran rife that the price of oil would one day reach $200 a barrel. Fuel costs now account for 40% of all airline expenses and “according to an industry analyst, a 3 percent daily rise in oil prices is enough to wipeout an entire years profit” (Seany 2008). The rising cost of oil is a global concern with international ramifications for sub-sectors of the tourist industry. From a business perspective, the important position of suppliers ads further credence to the assertion that some subsets of the airline industry play an undue role with respect to the sustainability of the industry. Why I care The travel industry is in a constant state of change and flux; this is thus an important industry to study with respect to the challenges it faces in the 21st century. Airlines make international travel possible and today it is easy, painless and relatively cheap to fly from one end of the earth to the other, often on a whim. We have begun with an overview of Porter’s Five Forces and its application to the airline industry. While defining each Force and providing for its applicability to the industry, this analysis has provided a thorough overview of both rising competition (2) and the bargaining power of suppliers (5). We explored the three major innovations of the 1980s, following deregulation, which effectively transformed the industry. These changes includes a “hub-and-spoke” route structure, the establishment of frequent-flier programs, created to enhance brand loyalty, and sophisticated reservation systems which sought systematize the way that travel, fare and information was made available. These changes could not have been made without the deregulation of the American airline industry. Looking to the future, the unpredictable cost of oil is the most pressing challenge facing the industry over the next 10 years. Accordingly, due to its dependence on oil and the inherent instability of global oil markets over the past few years, the airline industry must devise certain concrete steps to deal with fluctuating oil prices and unstable markets in order to remain a viable business option. REFERENCES Doganis, R. 2002. Flying Off Course: The Economics of International Airlines. Routledge, London. Energy Prices. Bloomberg.com, Accessed September 14, 2009 http://www.bloomberg.com/energy/ Hill, C. W. L. 1998. International Business: Competing in the Global Marketplace. Irwin, London. Jenkins, G. 1998. Derivatives Trading by Oil Companies and Airlines: A Survey of the 1997 and 1998 Annual Reports with Critical Commentary. Sunningdale Publications, New York. Mouawad, J. September 12, 2006. OPEC confirms plan to retain production. International Herald Tribune, Accessed September 14, 2009, http://www.iht.com/articles/2006/09/11/business/opec.php Porter, M.E. 1979 "How competitive forces shape strategy", Harvard Business Review, March/April. “Oil scales new record above $115”. April 16 2008. British Broadcasting Corporation (BBC.com). Accessed September 14, 2009 http://news.bbc.co.uk/2/hi/business/7349852.stm Seaney, R. May 14, 2008. “Disaster for Airlines: Oil Prices”. ABC News.com, May 14, 2008, Accessed September 14, 2009 http://abcnews.go.com/Business/BusinessTravel/Story?id=4847008&page=1 Wensveen, J. G. 2007. Air Transportation: A management perspective. New York: Ashgate. “WestJet follows Air Canada with fuel surcharge”. May 05 2005. CTV News.com. Accessed September 14, 2009 http://www.ctv.ca/servlet/ArticleNews/story/CTVNews/20050815/westjet_fuelpricelevy_20050815?s_name=&no_ads= “World Oil Prices” WTRG Economics, Accessed September 14, 2009 http://www.wtrg.com/prices.htm Read More