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Chapter 2 Summary
Business Competitive Environment

Chapter Objectives
Defining competitiveness Competitive Model

Competitiveness: A Link to National Goals

Competitive Advantage of Nations

Diamond of National Advantage Model

Role of Government

Definition
Competitiveness: The degree to which a nation can, under free and fair market conditions, produce good and services that will meet the test of international markets while simultaneously maintaining or expanding the real income of its citizens.

Competitiveness: A Link to National Goals

Decreased Budget Deficit Stronger National Security

Human Resources

Trade Policy

Capital

Improved Domestic Performance

Increased World Market Competitiveness Reduced Trade Deficit

More and Better Jobs

Technology

New Competition

Increased Standard of Living

How to Gain a Competitive Advantage?

Provide value to the customer Right strategies - achievable and sustainable over time Know products and services Know customers Know competitors

The Diamond of National Advantage

Chance Firm Strategy, Structure and Rivalry

Factor Conditions

Demand

Conditions

Related and Supporting Industries

Government

Role of Government
Serve as a catalyst and challenger Encourage companies to raise level of expectations - higher level of competitive performance Do anything that would promote unrestrained competition

Questions
1. In order for companies to achieve and sustain a
competitive advantage, what would a possible action plan include?

2. For a government to perform effectively in its role

as a catalyst and challenger, what objectives should governments aim to accomplish?

Chapter 3 Summary
The Porter Competitive Model for Industry Structure Analysis

Competitive Model
Understand and Evaluate:
Business environment structure of an industry. Threats of competition to a specific company.

Porter Competitive Model

Potential New Entrants

Bargaining Power of Suppliers

Intra-Industry Rivalry
Strategic Business Unit

Bargaining Power of Buyers

Substitute Products and Services

Source: Michael E. Porter Forces Governing Competition in Industry Harvard Business Review, Mar.-Apr. 1979

Figure 3-1

Porter Competitive Model Components

Intraindustry Rivalry Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Threat of Substitutes

Primary and Supporting Strategies

Differentiation Strategy (Primary) Low Cost Strategy (Primary) Innovation (Supporting) Growth (Supporting) Alliance (Supporting)

Porter Value Chain

Basic Concept:

1. Deals with core business processes.

2. Enables tracking a new idea to create a new product and/or service from origination all the way to customer satisfaction.

Generic Porter Value Chain

SUPPORT ACTIVITIES FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT PROCUREMENT

INBOUND LOGISTICS

OPERATIONS OUTBOUND LOGISTICS

MARKETING AND SALES

SERVICE

PRIMARY ACTIVITIES
Adapted with the permission of the Free Press, an imprint of Simon & Schuster Inc.. from COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance by Michael Porter. Copyright 1985 by Michael E. Porter.

Figure 3-6

Possible Exam Questions

1.

What is the objective in using the Porter Competitive Model? How does the Value Chain differ from the Porter Competitive Model?

2.

Chapter 4 Introduction
Airline Industry Analysis

Key Points
Lessons Learned from Profitable Airlines s Analysis of the Airline Industry using the Porter Competitive Model Airline Industry Business Strategy Model Importance of IT in the Industry American Airlines as a Profile Airline

Still Consistently Profitable Airlines

Southwest Airlines
Aircraft Utilization, focus on city pairs, corporate culture, cost savings in reservations

Singapore Airlines
Geographic Locations, National Strategies, Shrewd Management and Leadership in IT, Competitive Strategies

British Airways has run into problems in recent years!

Porter Competitive Model

Airline Industry Analysis - North American Market
Aircraft Manufacturers Aircraft Leasing Companies Labor Unions Food Service Companies Fuel Companies Airports Local Transportation Service FAA Hotels

Potential New Entrants

Foreign Carriers Regional Carrier Start ups Cargo Carrier Business Strategy Change

Bargaining Power of Suppliers

Intra-Industry Rivalry
SBU: American Airlines Rivals: United, Delta, US Air, Northwest, Southwest

Bargaining Power of Buyers

Travel Agents Business Travelers Federal Government Pleasure Travelers Charter Service U.S. Military Cargo and Mail
Figure 4-2

Alternate Travel Services Fast Trains Boats Private Transportation Videoconferencing Groupware

Substitute Products and Services

Airline Business Strategy Model

Make note of the fact that the example in the textbook is not well done.

Airline Industry Strategies

Products/Services
Scheduled Flights Chartered Flights Customers Business Travelers Personal Travelers Seniors Families Government Europe Markets N. America Pacific Rim Routes and Route Structure Short Haul Long Haul Hub and Spoke Point to Point Latin America Air Freight Mail

Fare Strategy Low Fares Premium Fares Company Structure Alliances Independent Information Systems
Customer Systems Operational Systems Logistical Systems Business Systems

American Airlines
Has historically been the largest airline in the world in terms of revenue and number one in the U.S. A premium service carrier. Hub and Spoke System SABRE System Financial losses same as most other carriers

IS in American Airlines
Industry Leader in IS Convenience to Customers Knowledge of Customers Providing a Foundation of Other Systems Building a Base for other Business

Conclusions
Still a clearly defined industry. Information Systems play a vital role in the industry. The industry is greatly affected by many factors. Strategies dictated by the market are important.

Chapter 4
Porter Competitive Model and the Airline Industry

2003 - A Hundred Years of Flight

Aviation is celebrating its centennial year. From its first brave beginnings the civil aviation industry remains dynamic and although some of the priorities have changed, the spirit and passion remain.
Some priorities are not new: safety, the need for efficient operations, adequate capacity to meet growth and, of course, customer satisfaction. Other priorities have gained prominence in recent years security, war risk insurance and environmental concerns and will remain important in the coming years.

This industry is always in the grip of its dumbest competitors.

Robert Crandall Former CEO American Airlines

We must look at the world as it is versus how airlines would like it to be.
Robert L. Crandall

And as government officials, politicians and consumers would like it to be.

Airline Industry Goals

Public Service. (Service to Customers)

Return to Investors.
Country Strategic Resource.

Are these consistent or in frequent conflict?

Airline Profitability
Profitability = [yield X load factor] - cost In order to survive and profit in this tough environment, airlines attempt to manipulate three main variables: Cost, calculated as total operating expenses divided by available seat miles (ASM) Yield, calculated as total operating revenues divided by the number of revenue passenger miles (RPM) Load Factor, calculated as the ratio between RPMs and ASMs, which measures capacity utilization.

United Flight 815

Chicago to LAX, October 31, 2001 204 tickets were sold and 186 people showed up.

68 passengers originated in Chicago and 118 were from connecting flights.

97 passengers terminated at LAX, 89 continued on another flight. Of the 33 passengers that were only Chicago-LAX there were 27 different fares: A frequent flyer passenger paid nothing. A 1st class passenger paid $1,248.51 on the day of the flight. A coach passenger paid $102.26 on the day of the flight. A cash fare passenger paid $87.21 twenty-nine days in advance .

The National Commission to Ensure a Strong Competitive Airline Industry

Change, Challenge and Competition

A Report to the President and Congress August 1993

Airline Industry Report

The air transportation system has become essential to the economic progress for the citizens and businesses of this nation.

The commission questioned some of the most basic assumptions that have formed the foundation of policy toward this industry--and behavior within it--for the past half century.

It also questioned whether the airline industry has basic structural problems or if it is just a collection of poorly managed companies.

Commission Findings
The Airline Industry is more competitive than before deregulation in 1978. Travelers and shippers are charged less than in 1978. The Airline Industry has never made a sustained, substantial return on investment. It lost huge amounts of money from 1990 to 1993. It canceled many aircraft orders shortly after an unprecedented buying binge. Its freedom to compete in international markets is uncertain because of government restrictions.

Commission Conclusions
For the U.S. to prosper in a global marketplace the airline industry must:
Be efficient and technologically superior. Have the financial strength to respond to rapid change and opportunity.

Efficiently move people, products and services to markets, wherever they exist.

Recommendations
Efficiency: Reinvent the FAA. Financial Health: Deal with factors that impact the financial health of the industry. Access to Foreign Markets: Replace the current bilateral system with a multi-national regime.

To return their balance sheets to respectability, most airlines would have to achieve profit margins that are almost unprecedented in their history, and sustain those margins for years.

September 11 Impact
An absolute disaster for the industry.

1990-1993 Was a Disaster!

The Gulf War. The general decline in the world economy. Aircraft fuel price increases. Wages, work rules and work patterns. Chapter 11 bankruptcy airlines. Excess capacity. A very capital intensive business. Too many years as regulated airlines.

Airline Industry
The shock of September 11th has forced airlines to face an awkward fact: in some respects, aviation is a declining industry.

Nov. 22, 2001

The Economist

Decline in Air Travel

At Thanksgiving in 2000 a record 2.2 million Americans took a flight to spend the holiday with family and friends. Air traffic in October and November 2001 was down by about 25% compared to the previous year in the world's biggest aviation market, thanks to a combination of economic recession and the attacks on September 11th.

International Travel
International travel from America has been hit even harder: the number of Americans flying across the Atlantic was down by over 30%. Never mind that more people are killed on America's roads every three months than have died in the entire history of commercial aviation.

Fatalities by Transportation Mode

Airline Railroad Passenger Car
0

12

530

20,818

5000 10000 15000 20000 25000

Load Factors
Despite cutting capacity, the big American airlines are still flying with planes barely 60% fulla figure that would be much lower were it not for hefty discounts. Boeing and Airbus, the two manufacturers of large jetliners, are offering airlines special financing deals to pay for their purchases in order to stave off outright cancellations. The last time the airlines were in such straits, during the Gulf war and recession in 1990-92, it took them four years to return to profit, even though traffic recovered within a year.

European Airlines
The situation in Europe is no better. Two flag carriers, Swissair and Sabena, have collapsed since the terrorist attacks. Other big carriers, such as British Airways (BA) and KLM, are in major financial trouble. Traffic within Europe fell by over 10% in September and October 2001, while traffic from Europe to America and Asia fell by 35% and 17% respectively.

Looking for Options

In most industries, such a situation would quickly lead to mergers. But this is not so easy for airlines, hemmed in as they are by national ownership rules and rigid international regulation of routes. America's airlines are retreating to their strongholds in the hub airports they dominate, such as Dallas-Fort Worth (American) and Atlanta (Delta). Most airlines have cut at least one wave of coordinated flights in and out of their hubs.

Dropping Point-to-Point Flights

The biggest effect has been for airlines to drop non-stop point-to-point flights rather than those that go through hubs. The network economics of hubs becomes more attractive for big carriers when times are tough. A study of America's changed airline-route map shows that large carriers are cutting non-stop flights to cities where they do not operate hubs by more than they are trimming hub flights.

Unions and Vendors

The industry's woes have forced airlines to get tough with unions and suppliers over restrictive practices that raise their costs.

US Airline Industry Must Restructure or Die

Aviation Week & Space Technology November 2002
Low-Cost Airlines, Not September 11, Have Transformed Industry Fundamentals "When people say the traditional industry model is broken, they are moving their jaw without putting their brain in gear," responds former American Airlines CEO Robert Crandall. He added that he is skeptical that the industry will ever be competitive as long as there are so many carriers selling what has evolved into a commodity product.

Aviation Week Contentions

A collapse in pricing power and a fundamental shift in the buying behavior of business travelers, coupled with fierce competition from low-cost airlines, is forcing U.S. major huband-spoke carriers to restructure their operations or face the prospect of eventually going out of business. The crux of the problem is a combination of excessive costs in relation to carriers' current and projected revenues, an imbalance between the supply and demand for available airline seats, and an inability to boost air fares.

Corrective Actions
It will take much more than concessions by labor for major U.S. airlines to solve their financial problems.

Airline Industry US Market Share

Based on current trends, the domestic market share held by the six major US airlines (American, Continental, Delta, Northwest, United and US Airways) plus Alaska Airlines will drop from 75% in 2002 to 62% in 2010and 45% by 2020, according to an industry projection.

Southwest could pass American to become the largest U.S. airline by 2013, and JetBlue could pass Delta to become the third largest by 2020.

Industry Structure Problems

The fact that low-cost carriers have been able to mature this far says as much about what's wrong with the majors as it does about what's right with their low-cost counterparts, and begs the question: does the underlying strategy or business model employed by the large hub-and-spoke airlines still work?
Analysts and other industry observers believe it does, but to function properly carriers must reduce their costs and restore the balance between supply and demand.

A Sobering Fact
Before September 11, 2001, the global industry was showing a net loss on international services of around $3 billion.

Corrective Actions
Reduced capacity. Older aircraft may never return to service. Reduced wage pressures.

Continued joint agreements.

Discounted tickets and more travel packages.

Code Sharing Agreements

The US Transportation and Justice Departments approved a pact that will let Delta Air Lines, Continental Airlines and Northwest Airlines share access to each other's routes. The code-share agreement allows each carrier to market the others' routes as its own. One Northwest flight, for instance, might also have a Continental flight number and a Delta flight number.

The agreement is the biggest in the industry. US Airways and United Airlines have a similar agreement.

Code Sharing Agreements

It's an especially appealing arrangement to frequent fliers who prefer to build up miles on one airline while flying all three.
The government placed several conditions on the deal. Specifically, the DOT said 60 percent of any new code-sharing routes must serve those areas of the country that are considered under-served. It also bans anti-competitive practices like coordinated pricing or shared decisions about route planning and capacity.

Continuing Concerns
1. Fuel costs
2. Decisions regarding passenger services like whether to charge for food, the need for more electronic capabilities. 3. Upgrading aircraft. 4. Route strategies. 5. Union relations. 6. Relations with travel agents.

Porter Competitive Model

Airline Industry Analysis - North American Market
Aircraft Manufacturers Aircraft Leasing Companies Labor Unions Food Service Companies Fuel Companies Airports Local Transportation Service FAA Hotels

Potential New Entrants

Foreign Carriers Regional Carrier Start ups Cargo Carrier Business Strategy Change

Bargaining Power of Suppliers

Intra-Industry Rivalry
SBU: Southwest Rivals: American, United, Delta, US Air, Northwest

Bargaining Power of Buyers

Travel Agents Business Travelers Federal Government Pleasure Travelers Charter Service U.S. Military Cargo and Mail

Alternate Travel Services Fast Trains Boats Private Transportation Videoconferencing Groupware

Substitute Products and Services

Figure 4-2

Benefits of Information Systems to American Airlines

1. Convenience to Customers. 2. Knowledge of Customers. 3. Providing a foundation for other systems. 4. Building a base for other businesses.

Four Three Consistently Profitable Airlines

1. Singapore Airlines 2. Cathay Pacific 3. British Airways 4. Southwest Airlines

Singapore Airlines

Consistently profitable but experiencing profit pressures. Winner of multiple awards for airline excellence. An extension of the country strategy to be the business and travel gateway to Southeast Asia. An impressive travel infrastructure. Leader of the Orient Airlines Association (OAA) Abacus reservation system. Price collusion on major routes. Nervous regarding U.S. carrier price competition.

Why SIA is So Good!

Clarity and Commitment (to customer service).

Continuous Training.
Internal Communications. Consistent External Communications. Connection with Customers. Benchmarking.

Rewards and Recognition.

Professionalism, Pride and Profits.

Southwest Airlines

A U.S. carrier success story. Commuter airline that concentrates on city pairs. (Average flight is 400 miles or less and takes less than one hour) CEO Herb Kelleher, a Connecticut attorney turned Texan, had the best labor relations in the industry and an excellent company culture. Lowest cost structure in the industry. Company vision was to provide low cost airline service to an increasingly larger number of people. Objective to minimize reservation costs.

A Strength of Southwest Airlines

1. Focus.

2. Focus.
3. Focus

Best Airlines for Business Travelers

1. 2. 3. 4. 5.

6.
7. 8. 9.

10.

Singapore Airlines Swiss Air Cathay Pacific Midwest Express ** Japan Airlines Quantas ANA Virgin Atlantic Lufthansa KLM-Royal Dutch

11. Finnair 12. British Airways 13. Alaska 14. Air France 15. Varig 16. Aer Lingus 17. Kiwi 18. Air Canada 19. American ** 20. Delta**
Source: Zagat Survey of Frequent Flyers

Deregulated But Very Regulated

Safety factors.
Air traffic controllers.

Impact on constituents.
International routes.

Airline Alliances
The Star Alliance is the largest of the major groupings. Consisting of 15 airlines led by United Air Lines and Lufthansa. Star serves about 815 destinations in more than 130 countries.
Oneworld, which is eclipsed by only Star among the major airline alliances, is led by British and American Airlines. Eight airlines offer service to 550 destinations in more than 130 countries. SkyTeam is quickly becoming a major alliance player by serving more than 450 destinations in nearly 100 countries. Led by Air France and Delta, SkyTeam has also consolidated cargo services.

Barriers to Entry
Access to airports continues to be impeded by: (1) Federal limits on takeoff and landing slots at the major airports in Chicago, New York, and Washington (2) Long-term, exclusive-use gate leases (3) Perimeter Rules prohibiting flights at New Yorks LaGuardia and Washingtons National airports that exceed a certain distance.

Airline Industry Conclusions

It is a vivid example of the dynamics of the markets that it serves. Establishing strategies dictated by the market is critical. Once the right strategies have been identified, information systems can play an important supporting role.

Possible Exam Questions

1. Identify an industry where information systems act as a significant barrier to entry and explain the significance of this barrier. 2. Identify and explain the two basic strategies and three supporting strategies used by intra-industry rivals. 3. What is the primary benefit to be derived through the use of the Porter Value Chain?

4. Explain the logic and growth as a competitive strategy and provide two company examples where this was a key
strategy.