US sub-prime mortgage

"The fast changing economic circumstances of the last three years have impacted severely and urgently on earlier business strategies and have compelled significant changes."

The US sub-prime mortgage crisis of 2006 was the catalyst for the largest global recession of our generation. As house prices crashed the wider US economy suffered. The building industry cut its output by half, whilst banks and other lenders cut back on the credit made available due to huge losses (BBC, 2008). Due to Europe's close financial relationship with the US, in particular the UK, this crash in confidence soon spread to our own shores. By the end of 2008 the UK government had bailed out two major banks in RBS and HBOS to the tune of $35 billion making the government the largest shareholder in the two banks (Waples et al, 2008). A huge dip in consumer confidence was the main result of this continuing uncertainty surrounding financial institutions. This lack of confidence coupled with a lack of credit saw recession grip society, with hundreds of thousands losing their jobs as well as businesses going out of business at an alarming rate.

The purpose of this assignment is to evaluate four organizations (Ryanair, British Airways, Tesco and Asda) from two separate industries (aviation and grocery) and discuss how their business strategies have changed in these economically uncertain times. In aviation, the reality is that "in the past 18 months consumers and business travelers have cut back on air travel to cope with the economic downturn" (Marketing, 2009). This statement is more relevant to BA than Ryanair, as the British flag carrier struggles with increased competition. Their traditional strategy of differentiation appears tired in the current economic climate. Loyalty to the BA brand can no longer be relied on as customers become more sensitive to price. Their recent merger with Spanish flag carrier Iberia is evidence of the recessions affect on strategy going forward. Irish airline Ryanair on the other hand are relatively new to the industry, only beginning to compete on a large scale in the mid 90s. Their overall cost leadership strategy has manifested itself in no frills, which has proved hugely successful. Cost minimization and a steady increase in market share have seen the airline predict they will overtake BA as Britain's largest airline within months (Robertson, 2009). The grocery industry is next to be evaluated, through the two retail giants Tesco and ASDA. Tesco, Britain's leading food retailer with a 30% share of the supermarket sector (The Guardian, 2009) has a Hybrid strategy, formed through differentiation and low cost. This approach has proven hugely successful with rising profits and overseas expansion. Later in this assignment I will look at their Hybrid strategy from a theoretical perspective, in a critique of Michael Porter and his 'stuck in the middle' theory. ASDA are also a hugely successful retailer, adopting an overall cost leadership strategy. US giant Wal-Mart purchased ASDA in 1999, since which the retailer has intensified competition in the industry with a low price strategy. Their strength in these trying times was confirmed earlier this year, when CEO Andy Bond (2009) announced the creation of 7,000 new jobs, "at a time when many companies are having to lay people off.'

It is important to note that all of the strategies mentioned above are formulated according to the organizations environment, and the key aspect of this environment is the relevant industry they compete in. Michael E.Porter (1980) states that there are five main forces within any industry driving competition potential entrants, buyers, suppliers, substitutes and rivalry amongst existing firms. This is widely known as Porters five forces analysis, and is used by organizations to determine their position in their industry prior to formulating strategy.

The first industry to be looked at is aviation, in order to learn more of Ryanair and British Airways strategies. The industry has encountered many problems as a result of the economic downturn, which stems from a reduction in the number of people flying at present. It appears that transatlantic travel has been the biggest victim, with numbers falling up to 15%, "as the near collapse of the banking industry hit traffic and the weak pound deterred tourists" (The Guardian, 2009). Naturally, this is a trend that will affect BA and its success.

For a long time British Airways have pursued a differentiation strategy. Differentiation is the second of Porters three generic strategies. It can be defined as offering a service that is regarded as superior to those offered by competitors, enabling the company to charge a premium price (Meet et al, 2003). As Britain's flag carrier BA charge more than other airlines in the industry, such as Ryanair. However this strategy is based on the customer's perception that the higher price is justifiable because of the extra services on offer. For example BA offer their customers first class and business class seating, as well as in flight entertainment and complimentary refreshments. Budget airlines such as Ryanair have taken away these additional services to create 'no frills' strategies, which will be discussed in further detail later. By pricing their service higher than competitors BA are attempting to enhance their margins, but in the current economic climate this approach is seeing the airline suffer.

The current difficulties facing BA arise from an increase in competition and a decrease in the number of people flying. Although the airline has the largest market share in the UK, so far in 2009 it has made a loss of $318 million (Redmayne Bentley, 2009). In these difficult times it is less likely that customers will take advantage of British Airways long haul flights, and more likely that if they do take a break they will stay close to home and book a cheap flight with one of the budget carriers. It is in these short haul routes that BA faces its stiffest competition. Ryanair and Easyjet have grown considerably since their entry into the market in the mid 90s, as one of the five forces, the threat of new entrants, has come to damage BA. However, in November of 2009 BA announced that they were merging with Spanish flag carrier Iberia in a deal worth $4.3 billion, in turn creating Europe's third largest airline (Milmo, 2009). This move is very significant in terms of competition, as a larger fleet and destination network will give BA a stronger position in the market, in turn helping them compete more with their rivals. The merger also reveals BA moving slightly away from their traditional strategy of differentiation, towards a competitive strategy to deal with a now hypercompetitive market, where their merger with Iberia will create a stronger base to counter the threat of rival airlines (Johnson et al, 2008). It also appeared recently that BA were attempting to pursue somewhat of a low cost strategy, as an industrial dispute between the airline and its staff centered on its desire to cut costs by reducing cabin staff and limiting wage increases (The Economist, 2009).

When Ryanair entered the aviation industry in 1985 their no frills strategy was put in place to avoid the differentiation strategies of flag carriers such as BA. Johnson et al (2008) states that ", a low price segment may be an opportunity for smaller players or new entrants to build volume before moving on to other strategies." Build volume is exactly what Ryanair did, so much so that their chief executive Michael O'Leary stated this year that they would soon be Britain's number one airline, carrying 1.4 million passengers in the British market during September (Robertson, 2009). However their strategy has stayed intact since their entry into the market. 'No frills' involves utilization of the internet to reduce distribution costs, quick turnaround times for aircraft to maximize their utilization, no complimentary food or drink in flight and no pre assigned seating. Even with their strong position today, the airline are constantly looking to reduce costs whilst keeping their prices relatively low.

In the face of the economic downturn there are still many examples of Ryanairs current success. However controversial the airline may be for their perceived lack of customer service, they posted a first quarter profit increase of 550% for 2009 of $195 million (CNN, 2009). Because of this success the airline now has over 950 routes across the continent and can compete with the likes of BA. The de regulation of the airline industry in 1992 allowed the Irish airline to adopt their low cost business model. Michael O'Leary seems to be aware that no matter how much bad press his airline gets, there will always be price sensitive customers, especially during a recession. In these times the airline industry could also be seen as a commodity market, where price becomes the key competitive issue (Johnson et al, 2008). Taking into account Ryanairs success, it appears that the majority of passengers want to get to their destination by paying the lowest price possible, and are no longer interested in the extra services that British Airways differentiation strategy offers.

The grocery industry in the UK has been affected heavily by the recession of recent years. The British Retail Consortium (2009) reported that in the lead up to Christmas food sales growth slowed, reflecting a reduction in food price inflation. Competition in this industry is extremely high, with over a dozen supermarkets vying for customers across the nation. Two of the better known supermarkets, Tesco and Asda, are pursuing different strategies in an attempt to increase their market share.

Despite increasing competition Tesco are still the largest supermarket in the UK with a 30% market share. The supermarket recorded profits of £3bn for the last financial year from its 4,357 stores worldwide, whilst ringing up sales of £1.02bn for every week of 2009 (The Guardian, 2009). The retailer possesses huge buying power as a result of their market share, and is able to remain competitive on price because of this. Huge profits have made overseas expansion possible, with the retailer operating in 13 countries spanning three continents. Moves into sectors such as retail banking and insurance have also been a result of recent success (The New York Times, 2009).

In strategic terms Tesco are in a unique position because of their hybrid strategy. Johnson et al (2008) define a hybrid strategy as "seeking simultaneously to achieve differentiation and a low price relative to competitors. " For this strategy to succeed Tesco must offer customers products with additional benefits at low prices, which will sustain profits to maintain and develop bases for differentiation. The hybrid strategy allows Tesco to achieve high volumes of sales stabilizing their position as market leader, whilst also remaining extremely competitive in a price conscious industry. Despite Tesco being market leader in the UK boasting huge profits, there is a school of thought that believes a hybrid strategy cannot be successful in dealing with competitive forces. Michael Porter (1980), the man who developed the three generic strategies, states that if a firm fails to develop its strategy in one of the three directions it faces being 'stuck in the middle' lacking market share to follow the low cost route or the focus to create differentiation. Of course Tescos success suggests otherwise a firm with high profitability and high market share. This suggests that the retailer have been extremely innovative in their strategic approach to the grocery industry, especially when one takes into consideration the current economic climate.

In contrast ASDA have pursued one of the three generic strategies, in the form of cost leadership. Since becoming a subsidiary of American retail giant Wal-Mart in 1999 the supermarket has grown from strength to strength, partly due to the American retailers experience of cost leadership activities. With huge buying power due to their market leader position in the US, ASDA can only stand to benefit. In 2008 sales jumped by 7%, with chief executive Andy Bond announced the retailer had "out-performed both their sales and profit plan, as well as growing their market share to its highest ever level " (Sky News, 2009). The retailer's strategy of cost leadership could also be viewed as a low price strategy, giving ASDA competitive advantage over their rivals. Their sales growth has been driven by an increase in customer numbers and a higher basket spend, enabling ASDA to continue driving its low cost agenda enabling it to fund lower prices for customers (ASDA Media Centre, 2009).

According to Meek et al (2003) "firms pursuing a cost leadership strategy would typically concentrate on continually striving to reduce their cost base and improve efficiencies. This could be achieved through activities such as economies of scale, cutting costs, global sourcing and using technology to develop more efficient means of production." An example of ASDA putting this theory into practice is their online shopping service, which has been increased to cover more than 90% of the UK population, and today is the nations second largest food home shopping business (ASDA Media Centre, 2009). A low-price strategy could also be used to explain ASDA and their attempts to gain competitive advantage, where the retailer attempt to achieve a lower price than competitors whilst at the same time retaining the perceived product benefits of products offered by competitors (Johnson et al, 2008). The retailer has emphasized this approach by announcing this January their ", biggest ever price cuts for a decade'(ASDA Media Centre, 2010).

All four organizations are currently operating in an economic climate that has collapsed many of their rivals. Although the theoretical basis of competitive strategy is important and should be adhered to, it is the present circumstances that should dictate strategy going forward. Michael Porters three generic strategies are seen by many as the best route to follow, and for some this is the case. However it is obvious there are flaws in this theory, the best example being the 'stuck in the middle' thinking of Porters work. What better example than Tesco, the biggest retailer in the UK, to show that a hybrid strategy can produce results, even in such trying times as these?

Whilst assessing the four organizations and their relevant industries, it becomes apparent that one organizations strategy is not standing up to the rigors of a world recession. During a world recession a world airline such as British Airways must do all it can to remain competitive. The airlines differentiation strategy is clearly not working, with huge losses and a reduction in the number of passengers. Change will not be easy however as an organizations position relative to their competitors determines their options for strategic change (Gottfredson et al, 2008). In this case Ryanair and Easyjet is also ample proof of where BA has gone wrong. However their recent merger with Iberia is a sign that the airline are making the first steps towards a more competitive position, and more such aggressive counter moves against rivals is needed in the future.

Going forward recommendations must be made for the four organizations. Which organizations need to re-think their business model? Economic downturns can be a time of change for organizations, and successful ones will adapt their strategy to keep ahead of competition, protect their existing business and gain competitive advantage (Rhodes et al, 2009).

In the aviation industry, BA and Ryanair are in two differing situations. Instead of continuing to drive differentiation, BA should emphasize their brand and customer service but in the form of overall cost leadership. Pursuing cost reductions would allow them to reduce prices on short haul routes, allowing them to compete with budget airlines. However the airline could still attempt to retain high levels of customer service, meaning they can retain a level of differentiation from their competitors. With Ryanair, it is difficult to recommend a change in direction for an airline that has grown at such a rapid rate. Their no frills strategy must be vigorously pursued for them to remain successful, however customer service is an area of their business that must be improved, no matter how price conscious travelers are at the moment.

In the grocery industry there are two more extremely successful retailers in the form of Tesco and ASDA. Tescos hybrid strategy in particular has proved hugely successful, but improvements can always be made. The sheer volume of Tescos sales means they could move more aggressively into other markets using an entry strategy. Why should the retailer concentrate efforts on food, drink and household items? More capital should be put into the technology and clothing industries to gain a foothold in these markets, which have many suppliers weakened by the global downturn. ASDA have benefited greatly from the expertise of their owners Wal-Mart in implementing a successful overall cost leadership strategy. With the current economic downturn showing no signs of abating, the retailer must continue to reinforce their price and value message, which has offered reassurance to consumers and demonstrated its price commitment (Marketing, 2009).

The strategies employed by the organizations have varied in their approach and goals. Of course the goals of an organization depend on what is going on around them. Who is to say that Ryanair will not employ a differentiation strategy once they have gained the requisite number of passengers? Or one of Tesco or ASDA doing the same once consumer confidence is repaired? Strategies are built on theory, but the external environment, in this case the global economic downturn, shapes the true direction of an organization.


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