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Business Strategy Dec 2007 Web Version Solutions

Business Strategy Stage 3 December 2007 Solutions

SECTION A (34 marks) Question A1 A first key issue for analysing this case study is to define the market or markets served by the participants. It is clear from the case study that Silverjet is employing a focused differentiation or niche strategy based on serving a narrow market segment (i.e. focusing on price sensitive business customers rather than corporate customers, economy and/or affluent leisure travellers). Maxjet, Eos and LAvion are all pursuing a similar strategy. Conversely, established network carriers like British Airways, American Airlines, United Airlines, Virgin Atlantic, Air France etc make a number of compromises to accommodate a range of customer types, i.e. business people, and economy and affluent leisure travellers. The internal configurations of their aircraft reflect these customer differences via the standard of service and facilities offered, i.e. first-class, business-class and economy cabins. Indeed the differences in services and facilities are also reflected in the airport terminals where premium paying customers gain access to additional services and facilities, i.e. preferential access to exclusive lounges, aircraft boarding, food and entertainment. Moreover, a major dissimilarity between the all-business-class airlines and the network carriers is the scope and scale of their operations. Size enables network carriers to offer a wide network of connections from their hubs and obtain attractive discounts due to their market power. In contrast all-business-class airlines operate small fleets and utilise non-hub or secondary airports, which do not offer business passengers convenient access to major commercial centres. A further basis for distinction between all-business-class airlines and network carriers is the level of pricing; they offer business travellers a considerable price discount, so offering value for money and high-levels of service. Where Silverjet stands out from both other all-business-class airlines and network carriers is via its passenger check-in experience. As described in the case study Silverjets check-in procedures reduce the time taken by passengers to board their aircraft and fly, i.e. under 30 minutes for passengers with carry-on bags to go from the airports terminal entrance to boarding their plane. It is likely that the inferior service offered by all business-class airlines (i.e. lack of convenient connections and limited frequent-flyer programmes) compared to major airlines will not immediately satisfy the requirements of mainstream business customers. Even so, the performance dimensions of all-business-class airlines are likely to appeal to price sensitive business customers who have previously curtailed or avoided business travel because it has been too expensive. Therefore, Silverjet is probably appealing to a new set of business customers over and above existing corporate customers who use the major network carriers.

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Finally, another distinction exists between the all-business-class carriers, i.e. Silverjet Maxjet and Eos serve the London to New York business passenger market, whilst LAvion provides flights between Paris Orly and New York, which is a completely different market. A flight from London to New York is not in the same market as a Paris Orly to New York flight. If a passenger desires a journey to London for business reasons, a flight to Paris Orly is not a realistic alternative. Using the perceived price and differentiation matrix the following distinctions can be identified.
Perceived price/differentiation matrix High Success likely Network carriers such as British Airways, Virgin Atlantic, United Airlines and American Airlines

Perceived differentiation vs competitive brands

Success highly uncertain Low-cost sector: Silverjet, Maxjet,and Eos

Failure likely Low Low Perceived price vs competitive brands High

Silverjet can be described as operating in the low-cost sector of the New York to London business-class passenger market along with Maxjet and Eos. The case study highlights that the all-business-class airlines low prices are attracting price sensitive business customers. The low-cost sector and the network carriers occupy different competitive spaces in the perceived price and differentiation matrix. Mainstream customers of the network carriers are liable to stay loyal due to greater flight frequencies and a wide network of connections from their hubs, as well as frequentflyer programmes and sophisticated discounted fare programmes for corporate customers. However, in the future the success of the all business class airlines will depend on wider acceptance by business customers for the inconvenience of non-hub or secondary airports, flight schedule improvements, and the introduction of frequent flyer programmes.

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Business Strategy Dec 2007 Web Version Solutions

Supplier bargaining power: high The all-business-class carriers like Silverjet have limited purchasing power compared to Network carriers. Small airline operators are less likely to gain positive contractual or negotiating terms with suppliers because their purchases will be of a smaller amount. On a more positive note the owners of non-hub or secondary airports are likely to offer them good terms because it provides them with a great opportunity to increase revenues via increased flight traffic. Threat of substitutes: mixed - depends on competitive responses Tele-conferencing and network carriers offer the greatest threat of substitution. The threat from teleconferencing is modest because physical contact is still regarded as being of primary importance. Therefore network carriers offer the single biggest threat. A small number of mainstream business-class customers are likely to switch to the new all-business-class carriers if the price differences remain high. For the majority of business passengers the benefits offered by network carriers are probably going to always outweigh the low price offered by all-business-class carriers like Silverjet. However, the threat could become high from network carriers such as British Airways if they decide to compete on price, because they could afford to offer substantial discounts over a prolonged period that would make the survival of the all business-class carriers unfeasible. In the past, British Airways has used price as a competitive weapon to compete against other transatlantic airlines that entered its routes, such as against Virgin Atlantic and Laker Airways. Industry rivalry: moderate The all-business-class airlines are virtually indistinguishable from each other in the following respects, i.e. their level of service, plenty of legroom space, elegant and attractive interior detailing, and bed-like seats. In spite of the aforesaid similarities price competition is not high, because the market for business passengers is growing, i.e. plenty of market share for all participants. Silverjet, Maxjet and Eos all believe product differentiation is their strongest selling point; consequently all of these companies compete away profitability via strong investment in advertising and branding in the hope of generating customer loyalty. Accordingly, switching costs will be moderate for business passengers rather than low as some of these all-business-class airlines will generate brand loyalty. Regardless of the abovementioned similarities, Silverjet can claim to be distinctive from the other two all-business-class airlines because it offers rapid check-in activities. Threat of new entrants: high The threat of new entries is high for a number of reasons. First, the capital requirements are significant, i.e. infrastructure and equipment costs are substantial which necessitate the participation of large organisations or well financed multinational companies, private equity companies or venture capitalists. However, as the case study states the plans of Richard Branson to launch an allbusiness-class airline represents a significant threat because the Virgin Group has the funds, industry knowledge and the reputation/image to be a major competitor. Second, gaining access to United Kingdom and United States airports which are

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close to the necessary critical mass of business passengers may be difficult because the best non-hub or secondary airports have probably already been taken by existing airlines. Third, existing competitors like Silverjet already possess industry knowledge and this will give them an absolute advantage over start-ups. Other barriers new entrants would have to overcome would be the reputation or company image already created by existing competitors. Certainly the current viability of airlines like Silverjet provides them with some economies of scale over any new entries that do not have a customer base. In summary, it would be difficult for new participants to enter the industry segment, but not impossible. On balance the threat of entrants would normally be considered to be moderate, but given the favourable market growth and the forthcoming launch of Bransons new airline the threat can be classified as high. It is especially notable that a major airline such as Virgin Atlantic sees the all-business-class market as being viable, because it is likely that other major carriers will follow suit and offer flights between further European cities and the United States. Buyer bargaining power business customers: moderate Business customers will generally be sophisticated buyers of airline services because they are usually frequent flyers; thus they have more awareness and information to assess the merits of airlines services. Certainly enhancing the sophistication of many business customers from large organisations is their access to internal or external travel specialists who organise flights on their behalf in an effective and efficient manner. The lack of real frequent flyer programmes offered by the all-business-class airlines also means switching costs for business customers are limited. Nevertheless, branding and product differentiation (i.e. check-in experience) by Silverjet means some business customers are likely to be brand loyal if the companys offerings are aligned to their expectations. Any brand loyalty achieved by Silverjet will create moderate switching costs for business customers due to perceived product differences.

(b) Porters five forces analysis suggests that Silverjet operates in a highly competitive industry sector. Whilst business passenger numbers have grown since 2003, the five forces analysis indicates that the structure of the industry is a highly risky one for Silverjet. In particular, the threat from substitutes represents the highest degree of risk. If network carriers such as British Airways decided to initiate a price-cutting campaign, operators like Silverjet, MAXjet and Eos could not sustain lower prices indefinitely. Without a doubt the additional benefits offered by network carriers combined with low prices would eliminate demand for existing all-business-class carriers. In addition, network carriers investment in upgrades may require allbusiness-class carriers to invest substantial sums of money in new product development and process improvements, again increasing the price of competing. A further area of high concern is the threat of entrants, although the barriers are considerable a major airline has already signalled its intention to launch an allbusiness-class airline and the continued growth of business passenger numbers is likely to trigger more entrants.

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Another high risk factor comes from the bargaining power of suppliers. The airline industry is vulnerable to economic and political events that can quickly reduce customer demand. Of note have been the loss of consumer confidence due to terrorism threats and SARS, and the increasing cost of fuel reducing yield per customer. In difficult times the small airline operators inability to negotiate preferential terms with suppliers is a further burden that is more likely to force them out of business than their larger rivals. On the positive side, rivalry is moderated by business passenger growth, which allows each all-business-class carrier to grow and survive. However, some profitability is competed away by each airline via promotions and advertising to maintain their status as a differentiated provider. Finally, buyer power offers a moderate source of risk as branding and Silverjets check-in experience may influence customers to remain loyal. On balance, the analysis of the all business-class industry sector indicated that it was unattractive due to concerns associated with substitutes, threat of entrants and supplier power. Even the forces that show a moderate level of concern at the moment (i.e. rivalry and buyer power) have the potential to deteriorate rapidly given the wrong circumstances. Accordingly this analysis largely supports the claims of industry experts that the chances of these all business-class airlines surviving are low.

SECTION B Question B1 (a) Chapter 4 of Business Policy 2 Students should discuss the strategic growth options available to companies. These options are market penetration, product development, market development and diversification. Each of these options is discussed below: Market penetration: Market penetration is a strategy by which a firm emphasises the pursuit of increased market share while maintaining its present range of products and markets served. This form of growth can be achieved by using two different approaches either in combination or independently: first, Silverjet may attempt to maximise its use of existing customers by selling more of the current product or service range to them. For example, many airlines reward their business customers for frequent use with air miles bonuses. The accumulation of air miles allows business customers to obtain significant reductions on the price of the service over time. Due to these cost savings and other benefits such as superior service, company executives are encouraged to make greater use of the airline's service. A second approach is attempting to attract new customers to its existing product range, thereby expanding the size of its customer base. This may simply involve the more aggressive use of promotional programmes to increase customer frequency of purchase or use. Product development: Amongst the most common options for growth is product development. This growth strategy emphasises product (or process) innovation, or at least entails substantial modification of existing products to be sold into current markets served by the firm. In terms of Silverjet, product development may entail

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offering more benefits that enhance the business passenger experience (i.e. partnerships with other organisations that provide supplemental services such as hotels, hire cars and other transport operators like buses). Ticketless travel and new interactive entertainment systems are other possible product enhancements to attract and retain customers. Silverjet has already differentiated its service or modified its product via its check-in experience. Market development:This strategic growth option entails locating new markets for the firms existing products. The most obvious case of companies employing this option is in the development of new geographical markets. An example of this growth would be if Silverjet began to offer new routes and destinations between the United States and the United Kingdom. Diversification: Diversification differs from other strategic growth options because it involves the simultaneous development of new products and new markets by a company. As a course of action it offers a company the most difficult and complex growth option to manage. Within this option there are two important distinctions to be made between related and unrelated diversification. Related diversification refers to a company moving into a new area of business that holds some connection with its existing activities. For example, many successful companies seek opportunities vertically along their industry chain. In the case of Silverjet, management could decide that performing an activity currently provided by outsiders such as aircraft catering or maintenance may give it greater quality control and/or an opportunity due to expertise to build a new business. Unrelated diversification involves a company extending its activities into areas of business where it has little or no discernible synergy. In other words, a company enters a new industry that will have completely different competitive characteristics. Silverjet could follow the lead of the easy Group, which originally began a low-cost airline called easyJet, then subsequently launched other businesses, some related, but many unrelated such as Internet cafs, online price comparison, personal finance, cinema, male toiletries, online recruitment, pizza delivery, music downloads, mobile telephony, and wrist watches! (b) Chapter 1 of Business Policy 2 Market research studies have discovered that a group of customers called early adopters tend to provide a purchase role model for other groups - they are trendsetters and opinion leaders. In our modern society they tend to be politicians and business leaders, or celebrities such as sporting heroes, popular singers, movie and television stars, and fashion models and designers. Individuals in this group are characterised as being ambitious, bold and successful in their endeavours; as a result they command a lot respect from the general population. Due to their status they are aware of new products so businesses in general ensure they supply them with up-todate product information. This awareness means other people in society look towards early adopters for guidance in their purchase decision-making. Therefore, the example they set in their purchases can have a significant impact on society in general. Many companies are aware of this role and use these individuals to stimulate demand through celebrity endorsements, sponsorship, sales promotions and advertising.

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(c) Chapter 5 of Business Policy 2 When an industry is mature there is less opportunity for companies to differentiate their products and services because of standardisation. The competitive rivalry that occurs between companies in the embryonic and early growth stages leads to the development of many unique activities as competitors attempt to differentiate themselves. However, with the passage of time, the unique activities that produce the best sales results will be rapidly imitated by competitors and become standard practice across the whole industry. As a result, the products and services offered by an industry tend to be very similar in a mature environment because of previous competitive manoeuvring. For example, the network carriers discussed in the transatlantic airline industry all offer numerous flights and have a wide network of connections from their hubs, as well as frequent- flyer programmes and sophisticated discounted fare programmes for corporate customers. In order to remain successful in the maturity stage, companies need to look for strategies to differentiate themselves from other firms, either through price, product, marketing, distribution or service. Fundamental to the search for differentiation is the identification of attractive and profitable segments. Significant differences in profit and growth rates can occur between different segments within an industry. Apart from different growth rates between segments, the structure of segments can also vary considerably i.e., buyer power, supplier power, concentration of competitors and the ability to differentiate products. Therefore, an important strategic decision for firms in mature industries is the creation, entry or development of industry segments that offer the potential for growth and profitability. (d) Chapter 6 of Business Policy 2 The shift from maturity to decline has three main causes and these are described below: Technological substitution: A new technological innovation can render existing products or services superfluous. As discussed in the Viable segments section, a major shift in the relative cost and qualities of synthetics all but destroyed the linen industry in Northern Ireland. Demographics: Decline is also caused by a reduction in the size of the customer group purchasing an industry's goods or services. Demographics provides important insights about the composition of a customer group, enabling the group to be divided into various strata such as income levels, educational achievements, marital status, age, and so on. Investigating the composition of a customer group utilising these types of statistical classifications is a useful means of monitoring the possible threat of decline. For example, the number of babies born in most western countries is decreasing. This reduction in numbers will have important implications on a diverse number of industries such as producers of childrens clothes and toys. Therefore, demographics can help determine the potential demand of a particular industry segment.

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Changing lifestyles: Customer demand can fall due to changes in consumer tastes and buying habits. For example, within the United Kingdom consumption of beer is declining. This decline is the result of an increasing preference among consumers for wines and spirits. The lifestyle of British people is changing as they adopt a more continental European approach to drinking and socialising. Continental Europeans largely socialise in the relaxed atmosphere of wine bars and cafes when they drink and eat. Wine consumption is increasing as more British people adopt this form of relaxation. Also, an increasing number of young British people are buying designer cocktails and spirits, which combine sodas, fruit juices and soft drinks with alcoholic spirits such as vodka.

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Business Strategy Dec 2007 Web Version Solutions

SECTION C Question C1 Drawing upon Chapter 5 of the core material provided, answers should refer to the themes of local-economy, national defence and independence needs, the impact of FDI upon host-country industry, entry barriers, the need to protect local infant and other vulnerable industries, the needs for national governments to maintain their employment policies, the requirements for industry restructuring within the host economy, and a range of host-country political objectives. For the second part of the question, answers should note that in addition to hostcountry tax-payers funding any trade subsidies, local consumers may experience a lower level of market efficiency in terms of competition (and therefore prices) and resource use. This may be seen in terms of the range and quality of goods and services available. Protectionist policies in one economy may also give rise to retaliatory action by others. A contrast may be drawn between the UK car market where there are only limited local controls (relating to vehicle safety etc), and India where strict import controls have an impact upon local prices and product quality.

Question C2 Drawing upon Chapter 7 of the core material provided, answers should refer to the range of ethical issues faced by internationalizing firms. This includes issues of factor market dominance (including labour and other supply markets), relations with local competitors, the range of relations with host-country governments, legal and taxation authorities, and the broader issues of the cultural impact of large international companies on small host economies. Specific practices that may be analyzed include the employment of child sweatshop labour, corruption of local officials, dominant relations with local trade unions, and insufficient care of the host-country environment. Internationalizing companies may argue that they will not secure contracts unless they engage in certain of these practices, including corrupt relations with influential hosteconomy nationals. They may also feel with regard to a range of employment practices that they are simply paying the local host-economy going rate for the job. However, companies should recognize the damage that can be done to public relations in general, and their wider brand image in particular, unless they adopt appropriate Western codes of practice with regard to this range of issues, including environmental matters.