SUMMARY OF BUSINESS LEVEL STRATEGY AND SINGAPORE AIRLINES CASE

ASSIGNMENT FOR BUSINESS STRATEGY CLASS

NAME : Kuspratama

NIM : 29113021

CLASS : R 49B

MBA-ITB

YOUNG PROFESSIONAL PROGRAMME

2014

Business Level Strategy Outline

A business-level strategy is an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage and strategic position by exploiting core competencies in specific product markets. Choosing to perform activities differently or to perform different activities than rivals is the essence of business-level strategy. There are five five business-level strategies to establish and defend their desired strategic position against competitors: cost leadership, differentiation, focused cost leadership, focused differentiation, and integrated cost leadership/differentiation. The effectiveness of each strategy is contingent both on the opportunities and threats in a firm’s external environment and on the strengths and weaknesses derived from the firm’s resource portfolio.

Business-level strategy details the actions managers take in their quest for competitive advantage when competing in a single product market.2 It may involve a single product or a group of very similar products that use the same channel. It concerns the broad question, “How should we compete?” To formulate an appropriate business-level strategy, managers must answer the “who-what-why-and-how” questions of competition:

Who—which customer segments—will we serve? What customer needs, wishes, and desires will we satisfy? Why do we want to satisfy them? How will we satisfy our customers’ needs?3

To formulate an effective business strategy, managers need to keep in mind that a firm’s competitive advantage is determined jointly by industry characteristics and firm characteristics The more attractive an industry is, the more profitable it is. As discussed in industry attractiveness can be assessed using the structure-conduct-performance (SCP) framework and the five forces model plus the availability of complements. Managers need to be certain that the business strategy is aligned with the five forces that shape competition. They can evaluate performance differences among clusters of firms in the same industry by conducting a strategic-group analysis. The concepts introduced in business level strategy allow us to look inside firms and explain why they differ based on their resources, capabilities, and activities.

1

A firm’s business-level strategy determines its strategic position—its strategic profile based on value creation and cost—in a specific product market. A firm stakes out a valuable and unique position that allows it to meet customer needs while creating as large a gap as possible between the value the firm’s product creates and the cost required to produce it. Higher value tends to require higher cost. Thus, to achieve a desired strategic position, managers must make strategic trade-offs—situations that require choosing between a cost or value position. Managers must address the tension between value creation (which tends to lead to higher cost) and the pressure to keep cost in check so as not to erode the firm’s economic value creation. (The difference between value creation and cost is sometimes called the value gap.) A business strategy is more likely to lead to a competitive advantage if it allows firms to either perform similar activities differently, or perform different activities than their rivals that result in creating more value or offering similar products or services at lower cost.

Generic Business Strategies

There are two fundamentally different generic business strategies—differentiation and cost leadership. A differentiation strategy seeks to create higher value for customers than the value that competitors create, by delivering products or services with unique features while keeping cost at the same or similar levels. A cost-leadership strategy, in contrast, seeks to create the same or similar value for customers by delivering products or services at a lower cost than competitors, enabling the firm to offer lower prices to its customers.

These two strategies are called generic strategies because they can be used by any organization—manufacturing or service, large or small, for-profit or not-for-profit, public or private, U.S. or non-U.S.—in the quest for competitive advantage, independent of industry context. Differentiation and cost leadership require distinct strategic positions in order to increase a firm’s chances to gain and sustain a competitive advantage.5 Because value creation and cost tend to be positively correlated, there exist important trade-offs between value creation and low cost.

2

The 'differentiation' strategy involves creation of differentiated products for different segments. A variety of products, each branded and promoted differently with levels of function, allows a company to 'desensitize' prices, and on the basis of being different, charge premium or higher prices. This strategy also provides a hedge against different markets and product life cycles, allowing cash flow to come in even if a few products decline, while others grow or mature.

The cost leadership strategy is an integrated set of actions taken to produce goods or services with features that are acceptable to customers at the lowest cost, relative to that of competitors. Firms using the cost leadership strategy commonly sell standardized goods or services to the industry’s most typical customers. Cost leaders may want to concentrate on the primary activities of inbound logistics and outbound logistics.

Case Reading Material : (Singapore Airlines Balancing Act)

Singapore Airlines (SIA) is one of the world’s leading players of the international airline industry. The Singapore Girl carrier, it is a prominent brand in providing high quality service standards to its customer. The current pressures of the contemporary business setting necessitate change on its managerial strategies. There are problems and issues in its operations like serving customers with high expectations and competitive pressures including technology innovations, travel cost, and labor issues. This case study looks on the ability of the Airlines to cope up with change. It also looks on the opportunities and challenges of change affecting the whole business functions. By providing case-based examples, the issue of corporate costs, security, and service are evaluated. Despite the outstanding performance of the Airline, it was recommended that innovations should be deliberate and continuous. Moreover, labor trends, changes and issues must be addressed immediately. Also, SIA should keep up on their research and development (R&D) initiatives as it is an important way of determining future forces that will directly or indirectly affect the overall business environment. There should be optimization in marketing strategy. Lastly, SIA must reach out to a broader target market and must project an image of good corporate governance practice and social responsibility. In sum, change is inevitable yet SIA will always be well-equipped with the needed characteristics to sustain its advantageous position and expand high quality standard management.

SWOT analysis

SIA’s key strength lies in the location of Singapore as an important crossroad of the world. Singapore is a relatively small country which has been one of the economic success stories of the last 25 years. As with other South-East Asian economies Singapore’s success lies in the strong trading links that the country has developed in the global economy. As a former British colony which gained independence in 1965, it had to market its services globally to be successful.In its early days the airline was much smaller than its rivals. This was a major internal weakness. SIA, as the national airline, was faced with an intensely competitive global market in which the big players like British Airways operated on many

3

routes with large fleets of aircraft. Until recently many countries have restricted access to air routes and airports in order to protect their national airlines against foreign competition.

The main opportunity facing SIA was the rapid growth in air transport for both passenger and cargo. Today the globe is a much smaller place, people can move rapidly from one continent to another in a matter of hours and more people have the disposable income to afford this. However, there are threats to an airline like SIA from the major national carriers of much larger countries, and restrictive regulation of air routes.

The SIA Group is Singapore’s largest private sector employer with a 28,000 strong workforce. The airline is committed to the development of its human resources. The airline has been able to develop its distinctive competitive edge in customer service through its people. From an early date SIA recognised the importance of customer service in gaining and retaining customer loyalty. SIA has always placed great emphasis on quality training for staff, which has established its cabin crew as the 'hallmark' of efficiency and customer service. This has led to greater competitive advantage

Singapore Airlines has consistently outperformed its competitors throughout its four-decade-long history, in the context of an unforgiving industry environment. Singapore Airlines has achieved its outstanding performance and sustained its competitive advantage, through effectively implementing a dual strategy: differentiation through service excellence and innovation, together with simultaneous cost leadership in its peer group. the organisational elements that have allowed the company to do so, illustrate its strategic alignment using a vertical alignment framework and conclude by high lighting the significant challenges ahead. Singapore Airlines: achieve a sustainable advantage through dual strategy by applying differentiation and cost leadership.

4

SIA adopts a holistic approach, creating a ‘wow’ effect by continuously benchmarking against the best in all relevant industries. SIA also strives to maintain consistency in service excellence that at the same time meets the need of every individual customer. This is made possible because of the way they value their staff and customers.In conclusion, there are two key lessons that we can learn from the SIA story. First, service excellence requires a total approach, i.e. excellent customer service is the result of all of the components being in place; the right culture, a clear understanding of the service and a service personality, good people and good systems and processes. The second key lesson is that it does not necessarily need to be expensive. The answer is to improve just a little bit, but all the time and in everything.

5