Strategic Management Short

1. Introduction

Strategic Management is a vast field of study. It contains numerous concepts which contain various sub-concepts. Despite the endless field of study, there is a core purpose of the strategic management concept. This purpose is –arguably- to define the competitive advantage of a business and take advantage of them in developing the company.

Discovering the competitive advantage of a business might not be an easy task, thus explaining the complexity of strategic management itself. It contains various analyses that lead to the reduction of every situation into corporate strengths and weaknesses. Afterwards, taking advantage of the discovered competitive advantage to enhance the company might also not as easy as it sound. It includes expanding the competitive advantage into a series of strategies and plans and monitors them as they are implemented in the targeted environment.

Sometimes, in the process of defining the alternatives of strategies, we discover the need to alter some portion of the competitive advantage itself. This is due to the nature of competitive strategy which has an inseparable connection with the environment in which a company exists. Because business environment contains numerous influential factors, this undeniable connection is what made strategic management a dissimilar challenge for each and every business design. In order to cope with such challenge entrepreneurs generally used several analysis tools that will help them discover the competitive advantages of their business and take advantage of them for the betterment of their companies.

Within this paper, we will use the Porter’s Five Forces, PEST analysis and background studies to analyze the competitive conditions surrounding the business of a well-known airline, the British Airways. The goal of this study is to define the strategic positioning of the company and finding an explanation regarding the causes and directions of the strategy.

1. Corporate Background

British Airways is currently the largest scheduled airline in United Kingdom and the third largest airline in Europe. The company has more than 200 aircraft flying to 550 destinations. The company is famous for being the airline with more flights from Europe across the Atlantic than any other airline. Their main base airport is the London Heathrow and London Gatwick. The airline has wide-reaching European and domestic shorthaul networks, increasing the reputation for being one of the largest airlines in the world in terms of area coverage and number of destinations.

II.1      History

            The company is a result of a merger between a numbers of smaller UK air transport companies. The company was formed in 1935. It was nationalized in 1939 to form the British Overseas Airways Corporation (BOAC). The BOAC was then merged with the British European Airways to form the British Airways in 1974. The company was the first to provide a supersonic passenger service in 1976. The company goes through its privatization process in 1981 and no longer a national airline. Afterwards, it experienced considerable downsizing and strategic change to face the challenge of free market. With its slogan ‘The World’s Favorite Airline’, the company develops itself in a private manner and became the world’s most profitable airline in the 1990’s.

            Not long after the newspaper exposed the highly profitable business of the British Airways, the company experienced one of the hardest shock in the airline industry. The September 11^th 2001 tragedy created a slump in the graphic of BA’s financial performance. It took some time before the company recovers a part of its profitability level. However, in 2005, the company was recorded to have carried 35 million passengers with total revenue exceeding 7.8 billion Pound Sterling (‘British Airways’, 2006).

II.2      Operations

            Most of BA’s operations are based in the London Heathrow Airport. The company has a commanding presence at Gatwick and Manchester International Airport, but their base remains in Heathrow. British Airways has the right to take advantage of up to 40% of takeoff and landing slots at the Airport Heathrow as a result of their activities of buying slots from other large airlines. Currently, they are using it for flying to the profitable trans-Atlantic route. Regarding the extent of their presence in Heathrow, plus their choices of destinations around the United Kingdom, the company is often considered as the national carrier of United Kingdom, regardless of their privatization many years ago. However, the company received notable questions about their weaker presence in Northern Ireland.

            Most of the fleet that does all the work mentioned above is using Boeing aircraft, a fact that receives considerable controversy because many UK operators within their class are already using the Airbus to support UK plane manufacturers. Furthermore, there are rumors about the company failed to carry passengers in a ‘younger’ aircraft. Passengers often comment and make jokes about BA having planes that are 40 years old. The management of British Airways challenged this sentiment by saying that Boeing has been a trustworthy trademark of the company for years and it is important to maintain the tradition of quality. The company still plans to order more Boeings in the near future. Statistics also revealed that the true average age of British Airways’ fleet was 9.7 years old.

            Besides having their personal fleet carrying passengers to destinations all over the globe, the company also takes customers by means of corporate subsidiaries and franchisees. The company is also well recognized to own a wide range of partnership network and apparently still working on improving the range of their cooperation. Their ‘one-world alliance’ is one of the vastest airline networks in the industry of aviation. They also have a well-acknowledged franchise program. Some of their recognizable franchisees are: the British Mediterranean Airways, Comair- South Africa, GB Airways, Loganair, and Sun Air-Denmark (‘British Airways’, 2006).

II.3      Competitive Advantage

            Competitive advantages are the values owned by a corporation that granted them their place in the market. Most of these values are valuable because no other competitor has similar capacity. Taking advantage of public opinions and perspectives, there are several identifiable competitive advantage of the British Airways. The most suggested one is the fact that they flew across the Atlantic with more frequency than any other commercial airline fleet. The company and its subsidiaries and franchisees have one of the largest area coverage in the world.

            Another notable characteristic of the British Airways is its cargo services. The company is the fifth-largest cargo carrier in the world. British Airways carries customers’ cargo throughout most of its passenger destination by means of scheduled flights. The cargo services also centered in the London Heathrow Airport, but they handle cargo orders from London Gatwick and Stansted Airports also. Furthermore, through their partner, British Regional Cargo, the company handles cargo orders from most of the regional airports in UK. The company has advanced and automated freight handling for standard cargo, unusual and premium cargo and fresh products. This segment of services handles about 80,000 tons of cargo a year.

            The third characteristic that should accounted as BA’s competitive advantage is its famous premium class services. The company has a reputation of providing passengers with one of the best premium services in the industry. A passenger who chooses to fly first class with the British Airways is called a ‘first passenger’.

The first passenger is provided with options of check-in system. They can choose to check-in via BA’s website; through automated self-service touch-screen kiosks at selected airports, where they could drop their luggage to the ‘fast-bag-drop’ points; or by the traditional dedicated check-in area in airports around the coverage areas. The first passenger is also provided with private semi-cabins with adjustable beds, touch-activated TVs, a dozen radio channels, and a first class menu that can be served at any time.

• Strategic Analysis

Within this paper, we are trying to provide a more ‘private’ perspective derived from personal analysis using several strategic analysis tools and theories. The strategic tools include the SWOT analysis, Porter’s Five Forces Analysis and the PEST Analysis. Each are useful to perform an internal as well as external audit of the company’s current strategic positions.

In the concluding chapter we will make a conclusion of corporate strategic positioning and its global strategy. Prior to using the strategic analysis tools, I will provide a view of the Airline industry that accounts for the several important issues that will describe the competitive environment in which the company operates.

III.1    Current Airline Industry

            The airline industry is one of the most competitive and strategic industries in the world. Thus, discussing strategic management concept using the airline industry as a case study is in fact appropriate. Some of the most notable characteristics of the industry are its highly capital intensive and its fast growing nature. The business is also highly sensitive to business cycle and has a highly competitive background. Before we continue with the analysis on British Airways Airline Company, it is appropriate to discuss to some extent, the development of the industry in the 21^st century.

            Due to the highly capital intensive nature, the need to rely on advanced technology, and the deregulation phenomenon in late 1970’s, the global airline industry has a history of being a highly concentrated industry. No more than 20 multinationals control significant portion of worldwide market share from hundreds of airline companies in the world. The largest player in the industry is the United States, especially, North America. The region accounts for 41% of the world total airline business (‘Airline Industry’, 2001).

III.1.1 Deregulation

            One of the most important incidents in the airline industry is the deregulation of airline services. Deregulation is the privatization of flying schedule previously managed by government. Every nation in the world experience deregulation of its airline industry at some point. In the United States, deregulation happens in 1978. Prior to that year, a government agency determined the routes each airline flew and oversaw the prices they charged. This was performed to ensure the safety and fairness of using the technology for public’s benefits. Today, however, the airline industry is mostly market-driven. Nevertheless, some international flights are still regulated by national agreements (‘Airline Industry’, 2001).

1. Positive Effects of the Deregulation

            The deregulation resulted positive effect toward the airline industry. Airlines can service wider range of market with the same size of fleet, and they have the capacity to choose the most profitable routes. Following the deregulation, existed airline expanded and newcomers arrived within the industry. The deregulation also caused increasing tendency toward consolidation as the majority of newcomers went bankrupt or merged with larger airlines (‘Airline Industry’, 2001).

            Other effect of the deregulation is the emerging of the frequent flier programs at larger airlines. Because airlines can manage their own routes and fairs, they may also run programs that will foster customer’s loyalty toward the airline. The deregulation also allowed Computer Reservation System to expand and became one of the key factors of airline profitability strategies today (‘Airline Industry’, 2001).

            However, as mentioned before, not all markets of the airline industry has been fully deregulated. The Europe market is perceived to have a considerable amount of regulated flights within their airline industry. There are still limitations toward having newcomers around in the airline industry and larger airlines still dominating pricing policies of the industry. The Asian countries, on the other hand, are perceived to have the most highly regulated airline industry. Nevertheless, development has also enters many of the more advance Asian countries, allowing open skies for the global business of the airline industry (‘Airline Industry’, 2001).

1. Negative Effects of Deregulation

The Deregulation policy in US and European countries caused airline services to smaller and less profitable countries to suffer. Moreover, they are burdened by high prices because of the market mechanism. Furthermore, travel from many airports has become monopolized by only a few airlines using a tight margin that eliminates competition. The market system increased pressure toward smaller and weaker airlines in the US. They are forced to consolidate with larger airlines within their domestic region or faced bankruptcy. The mergers and bankruptcy lead to so many jobs lost and the total volume of business within the industry to shrink notably (‘Airline Industry’, 2001).

III.1.2 Alliances

            In spite of the deregulation policy, intercontinental merger among airline companies are highly unlikely. This is due to the requirement that airlines must have a citizenship to maintain their operating rights within a nation. Therefore, one of the most popular ways to provide customers with intercontinental flights is making alliances. Today, more than ever, alliances are very popular. Airlines benefit considerably from the higher margin and cost savings through sharing maintenance, handling capabilities and operating facilities. The practice of joint aircraft purchasing is also quite popular today. It delivers huge cost savings from discounts as well as fleet standardization benefits.

III.1.3 September 11^th

            Another important incident in the global airline market is the September 11^th tragedy. Ironically, this incident occurs as the negative effect of the deregulation peaked. Many stated that September 11^th is the strongest factor that contributes to the collapse of the Global Airline.

However, there are also those who believed that the tragedy is only the last of a chain of problems that has been experienced by the Airline industry. Analysts believed that the industry has been sustaining heavy burdens for many years before the September 11^th tragedy, and the incident merely provided an excuse for the industry to collapse and rebuild itself from the start. Many airlines use the incident as an excuse to activate the force-majeure clauses that will legally free them from their contractual obligations to stakeholders (Ward, 2002).

            Whichever theory is true, the fact remains that the Global Airline industry suffers immensely after the September 11^th tragedy. There is approximately 140,000 jobs lost in the short period after the incident. On September 15^th, Continental Airlines announced 12,000 layoffs from the company, United and American Airlines announced 20,000 layoffs each, Northwest 10,000, US Airways, 11,000 and Delta Airlines 13,000. Those who survive the layoffs were having traumatic events that worsen the condition of the business (Ward, 2002).

            The important factor that we must take into attention is the effect of such incident to the development of the Global Airline Industry in the present. It is true that the airline industry are given the opportunity to start over, however, as the deregulation policy remains, the market remains controlling who get to fly and who does not. AS a result, the industry developed in an unexpected direction. The global airline industry prior to the September 11^th was characterized by having a high-class leader like those airlines who provide premium services and exclusive club programs. Currently however, low prices have seemed to be factor that has the largest appeal on customers.

            Apparently, passengers were tired of having to pay unbelievable prices for flying. Thus, when several airlines started to offer passengers low cost flights and calling themselves the ‘low-cost-carriers’, customer interests rocketed. The low cost segment experienced the strongest rate of growth during the last few years and analysts predicted that the low-cost carriers will be the future of the global airline industry. There is a good sense in taking this phenomena into account when designing or evaluating a corporate strategy.

            Analysts stated that the low-cost-carriers are logical consequences of the market condition of the global airline industry. Multiple catastrophes have seem to strike on the heart of the industry at a relatively short period of times. The negative outcomes of the deregulation, the September 11^th tragedy and the increasing prices of fuel and materials are some of those problems. Legacy airlines are forced to increase their -already high- prices to deliver the same premium performance they deliver before. Obviously, passengers who have already became reluctant to fly after September 11^th is given additional reason not to fly. Thus, when the idea of ‘flying peanuts’ comes to the market, many considered it as a new way of flying that everyone is expecting.

III.2    Porter’s Five Forces Analysis

            Porter’s five forces is an analysis tool that divides the influences received by a company into five factors, Rivalry, Threats of Substitutes, Buyer Power, Supplier Power and Barriers to Entry. These factors will help us describe the environment in which the British Airways is currently operating.

III.2.1 Rivalry

            This factor is characterized by examining the concentration ratio of the industry. An industry with a low concentration industry means that there are a lot of players in the markets and competition is in its high level. A high concentration on the other hand, represents the situation where there are only a few players within the industry that control significant share of the market (Porter’s, 2004).

            In the case of British Airways, the company is living within an area with a high concentration ratio. As mentioned before, the global airline industry is controlled by only 10 to 20 large airlines while others only have very small shares of the market. Nevertheless, the competition between these 20 players is intense.

After September 11^th, the market experienced a bounce back into the direction of the low cost carrier, which is a new challenge for the British Airways. Being the legacy airline of the United Kingdom, the company has few competitors of its class in UK, especially with the weaker market demand during recent years. However, the hardest competition comes from Easy jet (Baker, 2002), Ryan Air and other low cost carrier in UK. Many stated that British Airways would not survive for long in this low-budget passenger era without changing its competitive strategy.

III.2.2 Threat of Substitutes

            Substitution generally means products of another industry of other segment of an industry that could appeal customers as a replacement to our products. However, the definition expands to include similar products of our competitors also (Porter’s, 2004). In the case of British Airways, there are considerable threats of substitution. The company is a legacy airline.

In other words, the company has along history of success and well-known for its quality and customer service. There are only few of such company in UK airline industry. Competition of similar companies comes from legacy airlines of the United States. However, local competition comes from low cost carriers who provide less than premium services, but appeals significant portion of the market.

II.2.3   Buyer Power

            Generally, the airline industry has many customers from various regions and economic classes. Therefore, there are minimum threats that the customer would have control over corporate operations.

However, this condition does not seem to apply for British Airways. The company experienced a significant downhill performance over the last several years because customers prefer another type of airline service. The issue of cost becomes increasingly important today. It is the factor that could cause a large amount of customers to switch airline instantly.

III.2.4 Supplier Power

            Suppliers are strong if they have considerable number of customers, they are concentrated in nature and there is a significant cost of changing supplier. Suppliers of the airline industry on the other hand, have no such benefit. Suppliers are considerably many and their buyers are in equal numbers also.

If any, certain suppliers, like Boeing, are striving to keep their customer loyal as British airlines are all turning to buy Airbuses to support their local market. Lucky for Boeing, the British Airways maintain their tradition of providing customers with quality services by using Boeing aircraft.

III.2.5 Barriers to Entry

            The high capital involved within the industry pose as both an entry barrier and an exit barrier for airlines. There are also patent and technological issues that do not allow just anyone to start building airlines.

However, new entrants are generally discouraged by the competition and the history of the global airline industry which has put notable amount of airline companies out of their business. Nevertheless, deregulation policies have reduced the level of entry barriers compare to previous years. The government no longer has the authority to decide who enters the business.

III.3    PEST Analysis

III.3.1 Political Aspects

            Being in the airline business, government policies have considerable role in British Airways operations. Nevertheless, the rules and regulations regarding airline operations have been significantly reduced since the deregulation. Nowadays, regulations are strictly regarding safety and security. United Kingdom is also a country who has significantly reduced government interference in business. State-owned corporations are reduced to a very small number and privatization is encouraged in most industries (‘United Kingdom’, 2004).

            United Kingdom has a very strong political foundation which enables it to foster stability and provide a positive environment for business. Furthermore, The country actively promote trade agreements with foreign companies and it welcomed foreign investment  and provide investors with a range of trade benefits. The condition encourages cooperation and alliances between British Airways and other multinational airlines (‘United Kingdom’, 2004).

III.3.2 Economic Aspects

            United Kingdom is one of the strongest and most stable economies in the world. The country also displayed considerable GDP growth during the last 5 years. The UK market represents a considerable opportunity for business to grow. The UK airline market is reported to have a mild increase in market demand, as they are recovering from the September 11^th tragedy as well as the SARS incident. The country has a considerably high tax rate, which is normal for a country of such advancement level. United Kingdom is also characterized with higher wages and prices from average European countries (‘United Kingdom’, 2004).

III.3.3 Socio-cultural Aspects

            The country has positive attitudes toward business investment. It is still easier to open businesses in United Kingdom compare to other European countries. The country consists of multiethnic and multi religion society without any serious issue that could discourage business of any kind. Most of the population is in productive age, with only 30 % under and over the productive ages.

The country has a considerably high attention toward environmental issues. It is now working on reducing its green house emission as an effort to meet the Kyoto protocol. SARS and security are two issues that will receive sensitive reaction from the society. Both matters have its effect on the UK airline industry in the past (‘United Kingdom’, 2004).

III.3.4 Technological Aspects

            As one of the most advanced countries in the world, there are no significant issues regarding technology that will hamper businesses. Intellectual properties are highly acknowledged and technological resources are abundant (‘United Kingdom’, 2004). Regarding the airline business, the country has one of the most advanced airports in the world and one of the highly secured ones.

1. Strategic Positioning

British Airways has an interesting history of operations. The company grew under the positive business environment of United Kingdom, one of the most powerful economies on earth. The company was a former national company that went private in the 70’s. Along with the deregulation policy, the company maintains its legacy as provider of the best airline services in United Kingdom’s airline industry.

Being in the airline business, the company has faced tremendous competition within the highly centralized global industry in order to achieve its place today. It had also survived the negative effect of the deregulation policy which made many other companies went bankrupt.

Nevertheless, the negative effects of the deregulation policy have had its influence toward the company. One of the apparent marks is the frequent flier program which has been a notable characteristic of most airlines today. The company places its business in the premium segment of the industry. Thus, unlike other airlines, it frequent flier services is designed to reward those who fly within the executive cabins and up. Passengers under the executive level would have little chance to advance in the British Airways frequent flier program.

The company provides its customers with various premium value-for-money services that starts from checking-in until passengers arrive in their destinations. The company has an advanced check-in system with automated touch-screen stations and fast bag-drop-points in selected airports. The company provides customers with advanced flight cabins, high-class services including a range of menu and services that can be served at any time. The company also has one of the widest alliance networks that provide passengers with routes few other airlines in UK could provide. Together with its cargo services, the company provided customers with a mix of competitive advantages that built the company’s reputation.

Being in the premium segment has become a trademark and a uniform strategy of the company. However, the collapse of the global airline industry as a September 11^th aftermath has put the company in a doubtful situation. Many stated that the time for flying premium has passed, even for thick-pocketed business people. The company receives numerous suggestions and critics that its should change its global strategy, or at least become less uniform in applying its premium strategy, in order to survive (‘BBC News’, 1999).

Today, the company is under massive ‘attacks’ from competitors like RyanAir and Easyjet who belongs to the low cost market segment. Ironically, the company has sold GO, its business segment that is similar to those of the low cost carriers, prior to the September 11^th tragedy. Analysts have also stated that the company has an entirely different area of expertise compare to the low-cost market segment. Starting a business there would be a strange change for the company as well as it would be in the eyes of customers. Furthermore, it would be such a risky move that could cost the company its entire business. It would be extremely difficult to commit to such a change of direction, and a change without commitment is one strategy that is doomed to fail (‘BBC News’, 2001).

After some period of doubt, British Airways made a new global strategy to face the increasing challenge of the low cost carrier. It decided to pursue a differentiation strategy, where the company could address the challenge brought by the low cost carriers while maintaining their strong value-for-money segment. The company decided to introduce its low cost segment to the market to respond to new demands. In spite of the seemingly unfocused strategy, this type of differentiation strategy not unfamiliar among large airlines likes the British Airways. Qantas has implemented similar strategies when it introduced Jetstar to compete with a low cost carrier in the Australasian market, Virgin Blue (Done, 2004, Flootau, 2004).

I believe that the recent strategic change from the British Airways is a good step toward development and business survival. Maintaining tradition of a legacy is a good move, but without addressing new conditions and challenges, no business would have survived. The decision to be less uniform by maintaining premium operations in longer destinations and introducing cheaper flights in crowded destinations would help the company gain back some portion of its market share that has been lost to the low cost carriers in several of the last years.

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