Student ID: 149047719
Module: MN3100 Strategy
Title: Discuss the strategic challenges of an organisation of your choice and explore what could be done in order to address these challenges.
Topic: British Airways
Date: 14th December 2017
Introduction
British Airways is the flag bearer and official airline of the United Kingdom. According to British Airways (2015), it came into existence in 1972; however, it officially became a public limited company in 1984 after the merging of the British European Airways (BEA) and the British Overseas Airways Corporation (BOAC) and later privatized in 1987. In terms of fleet size and destinations, it is the largest airline company in Europe. Although the company offers a variety of services, it is known particularly for its customer service (British Airways, 2015). It operates in the airline industry, which is a highly competitive market. It uses its strong brand image to gain competitive advantage over its rivals. Alongside other airlines around the globe, British Airways is a founding member of Oneworld Alliance. This alliance was created to provide increased access for passengers to more destinations around the world (British Airways, 2015). The International Airlines Group (IAG) was another alliance created by the merger of the Spanish flag carrier, Iberia and British Airways. This merger brought about one of the largest airline groups in the world with the largest airlines in Europe as the founding companies, namely British Airways, Iberia, Aer Lingus (Irish flag carrier) and Vueling (a Spanish low-cost airline).
Statistics from the British Airways (2015, p. 5) shows that British Airways has seen a decline in total revenue of about 3.3% from 2014 to 2015 and also a decrease in passenger revenue of about 2.8% in the same years. Despite this, total expenditure improved by about 6.3% and net profit rose from £686 million to £2.493 billion (British Airways, 2015, p. 61). From the Statistics, there are challenges the organisation is facing that lead to decrease in the revenue and rise in expenditure. This Essay will analyse the challenges using SWOT analysis and Porter’s Five Forces. The analysis of the airline industry will be done using Porters Five Forces and SWOT analysis to identify the challenges British Airways faces. Solutions to the problems will also be offered using porters Generic Strategies.
PORTER’S FIVE FORCES
The porter’s five forces are Threat of New Entrants, Threat of Substitutes, Bargaining Power of Suppliers, Bargaining Power of Buyers and Competitive Rivalry (Porter, 2008).
Threat of New Entrants – New entrants in a market come with fighting power to gain a significant market share, which puts pressure on the market value and rate of investment necessary to compete (Porter, 2008). This happens most especially when the new entrant is diversifying from another market making their cash flow at their disposal enough for the market (Porter, 2008). In the airline industry, this threat is at a minimum because this requires a huge amount of capital and operation cost. The main threat in the industry comes from the low-cost airlines. The airlines may not need as much capital, and also the operation cost is less for them, which allows them to pay for the necessities such as fuel, parking and salaries.
Threat of Substitute – Substitute in this context means having another way of doing a particular thing. Porter (2008) stated, “The threat of substitutes in a market is having other ways of performing a particular function”. In the airline industry, other vehicles are classified as substitutes. In terms of short-haul flights, their threat is really high as the use of trains and cars are considered less stressful and easier on different scales. For example, the use of trains is a lot cheaper, and they are as convenient as planes. Also, as technology is evolving, the presence of live video streams, calls and conferencing poses a big threat as well the number of people travelling for meetings will decline. Nevertheless, the threat doesn’t apply to long-haul flights.
Power of Suppliers – In the airline industry, suppliers include aircraft supplier, pilot unions, employee unions and so on. According to Porter (2008, p.82) “The more the power of the supplier the more the suppliers will charge for their services”. For example, there are two main suppliers of aircraft in the industry, namely Boeing and Airbus. These two companies have dominated the market, leaving the buyer with little or no option to choose from. Other suppliers in the industry like pilot unions have the most power because they have no substitutes in the market. This therefore gives them the power to be heard because if the buyers do not meet demands it makes the industry vulnerable to making a loss.
Bargaining Power of Buyers – The amount of orders placed for a required product determines the bargaining power of the buyer (Porter, 2008). Bargaining powers in the case of airline industry has to do with the number of pilots demanded or number of aircraft orders placed to the supplying company and other things that need purchasing in the industry. Influence on profitability of supplier relies on the bargain power of the buyer (Porter, 2008). The advantage of the bargaining power is that the buyer can demand for a much lower price for a higher quality option. Bargaining power in the industry is limited because there are two main suppliers in the market. The buyers are not left with as much options as they would want. Another category of buyers in the industry is the passengers. The passenger has different options to choose from because there are various airlines available. If demands are not met or prices are too high, the passenger always has the option of switching to a different airline. This is a big challenge in the industry to satisfy the passengers demand.
Competitive Rivalry – “High rivalry limits the profitability of an industry” (Porter, 2008 p. 32). Rivalry can exist in different forms. It could be in the form of price discounts, introduction of new product or service or even improvement of a service or product. The main competition in the industry is the variety of airlines a passenger can choose from. The passenger’s demand is usually comfort, customer service and most importantly pricing. Due to these passenger demands, the airlines compete and offer discounted prices from time to time. The comfort is affected by the pricing. Also, Low-cost airlines are slowly taking over the market for short-haul flights because of their cheap prices. This leaves room for fierce rivalry in the market for long-haul flights.
From the analysis above, the challenges faced in the airline industry include competitive rivalry with evidence of fierce rivalry in the market and power of suppliers to be specific, power the unions’ pose.
SWOT ANALYSIS
Identifying the key strengths in the industry, threats, weaknesses and opportunities using the SWOT analysis. This will help narrow down the main challenges faced by British Airways.
STRENGTHS
Airline groups and mergers
Strong brand image WEAKNESSES
Union strikes
Employee working relation
Lack of value for money or decision making
OPPORTUNITIES
Market expansion
Growth of market THREATS
Economic instability
Competitive rivalry
Government Regulations
STRENGTHS
British airways have dominated the UK airline industry for years. This puts the company in a strong market position. In the year 2015, the most popular brand in the UK was British Airways (Smithers, 2015). Maintaining its strategic position is not a challenge for British airways as it has a large market share in the UK airline industry. Mergers aided British airways in maintaining a strong financial position and made it thrive in the market (The Economist, 2016). With the help of this, British Airways maintains a strong financial status and expansion ability unending.
WEAKNESSES
The unions have called several strikes based on their demands not met. British airways crew have pushed for better pay and improved working conditions. For the organisation to maintain its strong brand image and also their financial position, appropriate measures must be taken to solve this issue. The organisation made meals paid for on short-haul flights (Katz, 2017). This shows weakness as the organisation is trying to match low-cost airlines without realising it may damage the brand image of the company. British Airways is actually patronised because of the quality of services provided. The organisation has no value for money. It increases prices of services without considering the fact that there are competitors in the market that offer the same services at cheaper prices.
OPPORTUNITIES
There are various opportunities up for grabs to improve the brand image and increase its finances. Statistics from the World Tourism Organisation (2016) show that there has been a significant increase in international tourist arrival to the UK of about 5% in the first quarter of the year. Also, there were increases of about 9% in the Asian and Pacific regions, 7% in Africa, 6% in America and 4% in Europe. The statistics show the evidence of the growth of the market. This gives an opportunity for British airways to exploit and expand their customer base in such areas. With a better strategic approach, the organisation will be able to take advantage of the opportunities and use it to an advantage.
THREATS
Economic instability based on political decisions made is a huge threat to British Airways. For example, the decision to leave the European Union (EU) popularly known as Brexit has put the organisation in jeopardy. The threat the competition poses in the market for both short-haul flights as well as long-haul flights is immense. Major threats from short-haul flights come from the low-cost airlines while the long haul comes from the international airline competition. The competition usually provides competitive prices or better services. Government Restrictions also pose a threat to the organisation. There are several restrictions that may hinder its operations. For instance, the Night flight restriction imposed on Heathrow Airport, which is the airlines home.
CHALLENGES FACING BRITISH AIRWAYS
From the information gathered, the challenges facing British Airways include the fierce competitive market, economic instability and power of suppliers and unions. All these challenges pose more threat on the financial position of the organisation. Competition in the industry is fierce. Threats are being posed to the organisation on both national and international levels. According to The Economist (2016), Airlines such as Emirates, Etihad Airways and Qatar Airways from the gulf region are the major international competitors. However, there are many other competitors in Europe, Asia and even from America. These competitors include Lufthansa, Air France, Turkish Airlines and Delta. These airlines compete on the prices offered and quality of services offered. The national competition is based on the prices offered. Due to the low cost of expenses, the low-cost airlines are also putting up a challenge to British Airways. These include airlines such as Easy Jet, Ryan air and more. The low-cost airlines operate in such a way that a passenger pays for services such as meals and baggage allowance. Passengers are only allowed hand baggage on a flight. To compete with that, British Airways are trying to do the same. Measures were taken by British Airways to cut down fares to match low-cost airlines (Smith, 2016). Aside from that, the option of the type of flying a passenger wants and option of baggage allowance is given. The organisations revenue is put in jeopardy because of these measures. This competition in the market gives the passengers so much bargaining power. Passengers demand for better quality and prices knowing that there are other options, which put pressure on the organisation.
Economic instability in the UK has posed a great challenge on the organisation. Government decisions like the EU referendums on Brexit are likely to create uncertainties in the economy, which may further affect the organisation and airline industry as a whole. International Air Transport Association made a point that the organisation may face difficulties in the airline market because the organisation will no longer be part of a single aviation market. This will definitely bring about a reduction in the number of passengers. However, British Airways are trying to cut cost and optimize the resources they have available like keeping aircrafts that are due for retirement a little longer, particularly the 747’s (Katz, 2016). In so doing, the organisation does not realise it will have to spend more on maintenance of aircrafts and employing more from the unions. The maintenance is also impeded by the rise of US dollars against the pound sterling. The airline must adjust to the government decisions made and must adapt to the changes quickly. Also, Due to the fall of the pound sterling, the cost of importation of goods from the European market will increase; hence the Operation cost will have to rise to match the increase. All these have to be taken into consideration as it highlights the challenge Brexit has imposed on the organisation and airline industry as a whole.
The power unions possess is not in favour of the organisation. Unions have no alternative in the market, it’s either the organisation complies with their demands or at least come to a common ground or risk the possibility of a strike. The crew have voted in favour of industrial action. Addressing the issue as soon as possible will be in the organisations best interest. This will not only help their strategic plan but also will uphold their financial position (Topham, 2016).
POSSIBLE SOLUTIONS
Using porters’ generic strategies, in a competitive market, differentiation strategy is often adopted. Differentiation strategy allows a company to create something unique that makes it stand out from its rivals (Porter, 1980). This helps a company gain a competitive advantage. If British Airways adopts this strategy, it will help strengthen its brand image and possibly increase its financial position. By increasing the perceived value of product and services, an organisation differs from its competitors (Godfrey, 2016). Using a perceived value, the organisation will not lose but it may not make as much profit as expected. Using this approach will reduce competitive pressure on the organisation, as competitors have no match for the rival (Porter, 1980). Nevertheless, the strategy may incur extra investment, which may also put pressure on the fares charged. But also, having a strong image will keep the loyal customers.
Using the power of suppliers, British airways can force a negotiation terms with the government because of economic instability. The EU referendums strongly suggest that the organisation may have to adjust to the new terms. Staying with the single aviation market is the organisations best bet to maintain its financial position. Only the government can keep those terms because the organisation is a national flag bearer.
Conclusion
To sum up, the challenges facing British Airways were identified in relation to the challenges facing the airline industry as a whole. Porter’s five forces were used to identify the challenges. The threat of new entrants is not a challenge as the airline industry is not an easy market to get into. The market requires huge capital investments. The threat of substitute is limited to short-haul flights and has little or no effect on the long-haul flights. The threat in the short-haul flights includes trains, cars and in some cases even ferries. Power of suppliers is a major challenge for British Airways and the airline industry as a whole. It was noted that there were two major suppliers of aircrafts in the market. The power the two suppliers, namely Airbus and Boeing possess in the market is so much due to lack of competition.
The power of unions in the market is a major challenge for British Airways as unions possess the power to demand for what it wants and must be heard for consequences may arise if not heard. The British Airways crew pushed for industrial action as their plea for better pay and better working conditions was not heard. Power of buyers in the market is a challenge the industry is facing. The buyers being the passengers who use the airlines. The passengers look for alternative flights when the prices of the airlines are high or the condition of the airline is not good. This brings about fierce competition in the market between airlines. Competitive rivalry can also be categorised under short-haul and long haul flights. The competition that exists among the short-haul is with the low-cost airlines. The low-cost flights offer cheap prices, which pose a threat to the national carrier. The long-haul flights competition is usually between different flag bearer airlines. They compete in offering both the discounted prices and better or different services to the passengers.
The SWOT analysis analysed British Airways based on its strength, weaknesses, opportunities and threats. The forces that strengthened the organisation are the airline groups and mergers it is a part of, such as the OneWorld Alliance and the International Airlines Group (IAG) and also the organisations strong brand image. Some of the weaknesses identified include strike by the union because of the power they possess in the market, poor relationship with employees to the extent that the crew of the airline pushed or industrial action and Lack of value for many as the organisation wants to compete with the low-cost airlines. The biggest opportunity in the market for British Airways is the expansion of the organisation due to growth in market and increased demand. The economic instability in the United Kingdom is a major threat to the organisations strategic choices and financial position. Also, some of the regulations set by the government like the night time flight restrictions and competitive rivalry in the market. The proposed solution for a competitive market is the adoption of differentiation. Differentiation allows an organisation to create something unique to gain competitive advantage over rivals in the market. With the economic instability in the United Kingdom, the organisation can use the power of suppliers to its advantage and force a negotiation to come to a term that best suits it.
References
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