The report aims to assessing the internal and external environment, identifying the stakeholders; strategy development and SM model assessment. As one of the leading airliners in the world, British Airways has suffered a turbulent internal and external business environment in recent years. However it is still one of the leading and competitive airliners in the world. Its business can be carried out based on its core competences: brand reputation and the dominating flight slots in Heathrow Airport
In recent five years, the business environment of international civil aviation industry is turbulent and changeable. The recent economy downturn has forced BA to be sensitive and cautious about cost and the passengers' volume has been cut down in terms of business and tour travellers. The industry competition is getting fiercer as by the joining of the lower cost airliners which indicates BA has to master the value creation process, or the value chain, with business perspective and cautious. In addition, the cares on the stakeholders in each stage of the business should be paid attention to, or it may leads to the negative impact to BA such as the staff strike took place in January 2007, which gives BA's brand image a big shock.
To maintain the market share and competitive advantage in this industry, BA should focus on the resource optimization based on the changing demand; in addition the diversification is optional for BA which may allow it to compete with the lower cost airliners in the short hauls. In the long term prospective, the cost leadership can be applied in this market of high price elasticity, fierce competition and high innovative difficulty. Those recommendations are based on the former analysis.
British Airways (BA) is 'engaged in the operation of international and domestic scheduled air services for the carriage of passengers, freight, mail, and the provision of ancillary services' (Datamonitor, 2007). Its mission statement of 'To be the undisputed leader in world travel' indicates that BA is aiming to beat other rivals in the world wide context. BA has the 245 aircrafts at the end of March 2008 connecting 300 destinations worldwide with total passenger volume of 33 million (British-Airways, 2008). However, BA has to compete with some major competitors such as KLM-Air France or Lufthansa.
BA's objectives are to maximize the profit and minimize risks by providing decent quality of airline service. Security issue is increasingly important in this industry after the '9-11 attack. To achieve this goal, BA has adopted the functional structure based on Combined Code on Corporate Governance (British-Airways, 2008). The benefits of the structure are that it allows the expertise to be fully utilized as well as the enough control of economy of scale. The responsibilities are clearly assigned and the strategies mainly come from the top. However, with this structure the strategic change might be slow and the coordination is difficult (Lynch R, 2005). The structure is shown in following contents.
The products of BA can be categorized into 2 groups in terms of the routine distance: long-haul and short-haul. The main hubs are London Heathrow and Gatwick airport. Additionally BA has two main subsidiaries: the Opensky and Cityflyer. Opensky own one Boeing 757 linking Amsterdam, London and New York together. Cityflyer serve in domestic and European cities. Market share review is in appendix one.
Business Environment assessment: External
The external environment BA facing is turbulent. In macro-environment analyzing, external factors affecting will be identified.PEST Analysis
The appraisal focuses on BA's external environment.
The political and policy instability has led to strikes such as BA's staffs strike case in 2007, which indicates employees' right regulations must be concerned. The terrorist attacks happened on 11/09/2001 and 07/072005 have reduced the travelers' confidence.
The airliners don't have enough freedom in pricing where government interferes. The tax rising in 2007 lifts price.
The promotion of SESAR agreement (European-Union, 2008) changes the air-traffic-control style and reduces the aircrafts CO2 exclusion.Economic Factors
Fluctuating oil prices hit aviation industry a lot. BA has shown 6.4% increase in fuel-cost in 2007/08 (British-Airways, 2008). The economy downturn slows down the global trade and reduces customers' spending on travelling. The high elasticity in demand in this industry forces BA to be sensitive in pricing. Low-cost airliners make price competition fiercer.Social Factors
The opposition of aircraft noisy, air-pollution level and expansion program remain constant. Globally, the different social customs in different time of year means varied business opportunities.Technological Factors
Aircrafts hugely rely on the high-technology developments. The development of RNP system facilitates the manipulation and lifts safety standard. Additionally, the latest information system enables easier operation.Structure Factors
Porter's 5 Force Model, studied by Zhou Bin (2006) can be used to assess the structural factors that affecting BA.Degree of Rivalry
- Numbers of Competitors: BA has around 5 competitors in short-haul and 10 major competitors in long-haul. The number is increasing and low cost airlines are increasingly competitive in price.
- High growth rate: The aviation industry has 'continued its unprecedented winning streak in 2008' (John Persino, 2008).
- Profitability of Buyers. Customer based on different profit abilities needs have different needs.
- Customer's choice. Major players offering the similar services in this market then the customers have higher bargaining power. The customers have almost zero switching cost.
- Perceptions about quality. Customers can choose the service provider according to their quality recognition.
BA has two major three supplier categories: the jet fuel, airports and aircraft provider.
- Goods features and transition cost: there is no difference in jet fuels and currently there are no substitutes. The aircraft providers are bonded with the orders from BA, however, their products are mutual-substitutable, and then both of them don't have great bargaining power over. Airport is involved in the agreement with airliners.
- Supplier concentration level. There are only limited numbers supplying the entire market, which means their bargaining powers are not ignorable.
- Economy of Scale: BA's economy of scale cannot be achieved by new players in a short time. This is a major problem for the new comers.
- Customer loyalty: BA's brand of loyalty is significant and not replaceable shortly by new players. Building branding loyalty is a time-and-cost-consuming process.
- Capital requirement. Aviation industry requires higher capital than most of other industries. It is much higher to reach the desired economy scale.
- Transition cost: to BA, more substitute threats occur in the short-haul, the threat coming from trains or coach is gradually giving BA pressure. Although in UK the train is fast, it is not the same in entire Europe, and then the threat is not so high.
BA's business can be divided into the shout-haul and long haul trip.
- Shout-haul: Maturity stage
The market is basically saturated, profitability is lowering down and it's depending on 'customer's repeating consuming.'(Zhou Bin, 2006). The innovation is also difficult. The competition is fierce.
- Long-haul: Growing stage
The economy of scale enables the lower cost and the market is keep booming in term of increasing global travel. With the new route setting-up, the competition is getting fiercer.Industry structural analysis
The aviation industry is said to be an oligopoly. The facts lying in fowling points:
- Compare with other industry, there are only a certain few number of big airliners in this market.
- High Entry & Exit barrier.
- Product & service extensively differentiated
- Information restricted.
From 2008 to 2009, the economy downturn as slowed down the growth rate of industry, causing a $290M loss in the first six months of 2008Key Successful Factors
- Brand Reputation
The brand reputation is crucial to this industry as it indicates the quality, accessibility and safety. A good brand image can build more loyal customers.
- Economy of scale
This is a high-threshold industry with large initial funds. The production-relevant cost is also high. The economy of scale can lower the overhead cost and improve the individual unit performance and efficiency.
- Cost control
The cost in is industry is quite changeable for example the jet fuel costs. The management prospective must sensitively control the cost as it is crucial to the financial performance and firm's survival
The internal appraisal will reflect the firm's business capability. The resource will be listed and the analysis on capability and competency will be covered in this section.List of Recourses
BA's resource can be categorized into tangible and intangible groupsCapability and Value Chain Analysis
The corporate capability shows the ability that how able firms like BA can recognize and use the resources to accomplish the goal. The recourse scarcity and unique is where the comparative advantage can be gained. (Zhou Bin, 2006)
According to BA's resources available, the value chain study developed by Michael Porter can be used to determine BA's capability.
In combination with BA's resources, a brief explanation on each activity of value chain will be given:
- Firm infrastructure: BA's organizational structure and control system.
- HRM: undertaken training programs in management pilots and ground staff can constantly to ensure the service quality and security.
- Technology development: The skills and technologies required in production and management, such as the IT application in ticketing system, or the knowledge needed in negations with partners.
- Procurement: BA's Procurement team keeps in touch in 2050 suppliers in materials. (British-Airways, 2008)
- Inbound : the aircraft fuelling management, aircraft receiving,
- Operation: the production area of British airways. It covers route allocation, ticketing, passenger or freight check-in gate services and aircraft maintenance
- Outbound logistics: the final distribution of products to customer. Including aircraft operation, cabin services, connecting flights, and luggage processing
- Marketing and sales: ticket pricing, advertisement, and sale offers are included.
- Services: including customer tracking and target customers servicing.
To BA, its capability is determined by the optimizing and harmonizing the processes. This is how BA can distinct from other competitors. The final objective of the value chain is adding value to customer and creating the margin through managing this process.Core Competency of BA
According to above analysis, BA's core competences are:
- Brand reputation
BA is one of the largest airliners in the world. By 'Operating one of the most extensive international scheduled airline route networks,' (British-Airways, 2008), BA carries 33 million passengers in 2007/2008. The value of brand image is enormous as in an industry of high price elasticity passenger will be less-influenced by the price change in their preferred brand. The concepts of 'Exceeding customer expectations, 'personality', 'dignity' (Anon, 2007) are emphases in every BA aircraft for decades. BA is one of the most recognized brands among the people in world.
- Dominant flight-slots in Heathrow Airport
As the only airliners owning 40% of the flight-slots in the world's third-busiest airport, BA has sufficient dominant power in this world-gateway which enables BA to expand business in home and global market. The coordination with BAA has ensured BA's leading role in Heathrow airport in a long time.Financial appraisal
The financial appraisal focuses on six key ratios. All the calculation is on group basis. The data is obtained from the Annual Report 2004 ~ 2009. Comparisons will be made with last year's figure.Profitability Ratio
Comment: the trend indicates that BA is making better use of assets. The ratio in 2008 shows an increase. The reason is the Provision for settlement of competition investigations in 2007 costs BA extra 350m.
Comment: the reason of the 10% achievement could be the 300m increase in the revenue and the 100m decrease in the cost of goods sold, such as the employee cost the group equipment cost.Efficiency Ratio
Comment: the trend in recent two years indicates that BA is more and more capable in paying taxes. This could be caused by the increase in revenue and operating profit in 2008.
Comment: it indicates that BA has been managing and utilizing its fixed assets better. More revenue has been generated with the same level of fixed assets.Liquidity and gearing ratio
Comment: the rate increase of 0.2 from 2007 to 2008 should that BA is more capable to repay short term liabilities over its current assets. This is probably caused by the sharper decrease in current liabilities in 2008 such as the short term provisions and trade payables.
Comment: comparing with the 0.2 in current ratio, the 0.1 increase in quick ratio is caused by the increase in inventory in 2008.
Summary of External/Internal Factor
The internal and external appraisal can be concluded by the SWOT analysis.
Fox example the Dominance in Heathrow airport, which is BA's exclusive right. This is the areas BA can do better than others based on its strategies or resources.
Those downsides are caused by certain accidents or strategic moves. For example on the downturn BA's'voluntary severance packages' (BusinessDay, 2009) gives moral a negative impact especially among managers.
For example the terrorism threats forced BA to pause the flight to Pakistan in 2008 due to the hotel bombing.
For instance by Heathrow's expansion, BA's base capability will be enhanced and as it's dominator, BA will be able to gain more slots as Heathrow is on full-load now.
To analyze the stakeholders in BA, the Power/Interest Matrix (Gardner et al, 1986) can be applied in terms of its power and interest.Key Success Factor & Firm Analysis
- Brand Reputation
As the brand reputation is such crucial to this industry, BA's goal of being the undisputed leader, is based on achieving and maintaining the wide customer recognition. It also helps BA building customer loyalty in the long-run
- Economy of scale
By constant expanding and purchasing, BA can enlarge its fleet scale and make effective of each by resource optimization. It also help BA to lower average unit cost.
- Cost control
After expanding, the economy of scale can save the production and maintenance cost. It helps BA to reach a better financial status and lower down the threat of new player in the long-run.Product Positioning
In addition the Boston Matrix can position BA's business in terms of short-haul and long-haul
(Cash Cow Business)
Long-haul: it is in a growing market however large investments is needed to strength and expand the market share
Short-haul: the high-high situation means BA is in competitive lucrative positionKey Stakeholders Analysis
Merger can give customer more choice in travelling and more seat capacity, the differentiation is also favourable to customers as they are the reviving-end which means more product feature can be obtained. Cost-leadership is welcomed can somehow lower their cost which can lead a fall in the price.
- Industry Authorities
It provides the control and guide role in this industry. The merger can make their work and control easier; differentiation will not play so much on them; the cost-leadership is welcomed by them as it can set example of saving costs.
Merger for them indicates more opportunities of higher dividends and risks; differentiation also means more business opportunities and revenues. Cost-leadership can leader to positive financial performance which is directly related to their dividend payment in the future.
The 'school of thought' developed by Mintzburg can be applied of which the Positioning School (Mintzberg H, 1998) is believed to be applicable to BA.
In the positioning school the strategy formation is based on the scientific analysis of the industrial structure and the competitive position the firm currently has. () Founded by M. Porter, this school believe that the core of business strategy is to obtain the comparative advantages, which is determined by the profitability of the industry, or the industry attractiveness, and the firm's competitive position.
The external environment is emphasized in this school. The industry analysis can be carried out with PEST analysis, 5 Force model and the BCG matrix. According to school of thought, BA's business can be characterized as:
- BA is the leading airliner in the global market with relatively big market share
- BA is in an industry of low growth rate
- The industry profitability is lowering down and the overall economy trend is undesired.
Currently BA is suffering a brand crisis, caused by the Terminal 5 errors and BA038 crashing landing. The high luggage-losing rate also leads to critiques. BA also lacks of good strategy to compete with the low-cost-airliners and to cope with the fuel-cost instability.Strategic Model Assessment
The usefulness of strategic models applied in this article will be assessed individually.
- PEST analysis
PEST analysis recognizes the external variable factors that effecting BA. It has divided those factors into political factors, environment factors, social factors and technological factors. PEST is effective in business planning, environment assessing, marketing strategy formulating and business factor assessing. By the factor recognition, BA can make the strategy based on the usefulness of each factors.
- SWOT analysis
SWOT focuses on firm's internal analysis. By assessing on the firm's strength, weaknesses it has, and the opportunities it's facing, it enables the firm to combine the internal resources with the external environments together in strategy formulation. SWOT can help BA to manage the overall situation and clearly recognise its own position. Meanwhile by recognizing the threats, some risks can be possibly foreseen and eliminated. By SWOT, BA can plan its resource optimization and the future resource re-allocation.
- Porter's 5 Force Model
This model is a useful tool to assess the industry competition level. According to Porter, the degree of rivalry of an industry is determined by the bargaining powers of supplier and buyer, and the threat of new entry and substitute. Industry competition or the industry profitability is the firm primary concern in business. This is one of the most popular strategic analysing tools and is applicable in either domestic or international markets. The five forces could work together to influence the profitability. They are also where the strategy basis takes place. By examining the all the external factors, it mainly analyzes the relationships between the industry competition and all the firms.
- Value chain
According to M Porter, the value creation of a firm is through a series of linked activities, which includes supportive and primary groups. Porter reveals that the competition between firms such as BA and KLM is mainly taken place in the whole value chain. Meanwhile the competence of value chain decides the firms overall competence. Value chain analysis can help BA to recognize the value adding process in different activities and figure out its core competences.
- Stakeholder Mapping Techniques
Stakeholder mapping matrix has categorized the stakeholders into different groups in term of the varied power and interest that the stakeholders have. It implies how different stakeholders are impacted by firm's strategies. It is useful as it enables BA to build different attention or relationships with different stakeholders.
- BCG Matrix
Boston Matrix can help BA to recognize the competitive status each of BA's business is and enables BA to optimize its resource allocation. In addition, it also locates the firm's product range into one box which made the overall business appraisal easy and clear. However the critics on BSG matrix are that it's hard to define the growth rate and other business indicators are needed to make decision.