SMIII part B - Qantas - Matthew Boyle

Qantas Airlines – A Corporate and International Strategic analysis Matthew Boyle (a1211981)

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Table of Contents

Executive Summary .......................................................................................................... 3

Qantas – A Strategic Plan ................................................................................................ 4 Interpretation ............................................................................................................................. 4 Assessment ................................................................................................................................... 5 Explanation .................................................................................................................................. 5 Evaluation ..................................................................................................................................... 6 Justification .................................................................................................................................. 8

Appendix .............................................................................................................................. 9 1.0 Interpretation .................................................................................................................. 9 1.1 Corporate level directions ...................................................................................................... 9 1.1.1 Principles, behaviours and values .............................................................................................. 9 1.1.2 Current Direction/ Strategies ..................................................................................................... 10 1.1.2.1 Growth strategies – integrations and diversification ............................................. 11

1.2 International-‐level direction ............................................................................................... 12 1.2.1 Drivers of Internationalisation .................................................................................................. 12 1.2.2 Sources of advantage ..................................................................................................................... 13 1.2.2.1 Porters Diamond .................................................................................................................... 13

1.2.3 Current value network advantages .......................................................................................... 14 1.3 Current International Strategy ........................................................................................... 15 1.3.1 Market Selection strategies ......................................................................................................... 17 1.3.1.1 PESL analysis ........................................................................................................................... 17 1.3.1.3 Market-‐ Competitor retaliation ........................................................................................ 20

1.3.2 Market/ Nation entry Method .................................................................................................... 21 2.0 Assessment ..................................................................................................................... 23 2.1 Corporate strategic opportunities .................................................................................... 23 2.1.1 Directional – Growth ...................................................................................................................... 23 2.1.1.1 Integration ................................................................................................................................ 23 2.1.1.2 Diversification – Related ..................................................................................................... 24 2.1.1.3 Diversification – Unrelated ................................................................................................ 24 2.1.1.4 Diversification -‐ Capability-‐Based .................................................................................. 25

2.1.2 Portfolio Strategy ............................................................................................................................. 25 2.1.3 Parenting ............................................................................................................................................. 26

2.2 International Opportunities ................................................................................................. 26 2.2.1 Market Drivers .................................................................................................................................. 27 2.2.2 Market Selection .............................................................................................................................. 27 2.2.3 Mode of entry .................................................................................................................................... 28 2.2.4 Internationalisation and performance ................................................................................... 30

3.0 Explanation .................................................................................................................... 31 3.1 Move into Asia ........................................................................................................................... 31 3.2 Funding ......................................................................................................................................... 31 3.3 Other related strategies ......................................................................................................... 31 3.4 Alignment of strategies .......................................................................................................... 32

4.0 Evaluation ....................................................................................................................... 35 4.1 Risks/ opportunities of expansion .................................................................................... 35 4.1.1 Pride airlines ...................................................................................................................................... 35 4.1.2 Pride Hotel .......................................................................................................................................... 36


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4.2 Diversification and performance ....................................................................................... 37 4.3 Risks/ opportunities of outsourcing ................................................................................ 37 4.4 Risks/ opportunities of global sourcing/ strategies ................................................. 38 4.5 Risks/ opportunities of location & entry method ...................................................... 38

5.0 Justification .................................................................................................................... 39 5.1 Resources & Competencies .................................................................................................. 39 5.2 Cost efficiency ............................................................................................................................ 40 5.3 Organisational knowledge .................................................................................................... 40 5.4 Dynamic capabilities ............................................................................................................... 40 5.4.1 VRINE Framework .......................................................................................................................... 41

5.5 Sustainable competitive advantage .................................................................................. 41 5.6 Identifying strategic capabilities. ...................................................................................... 42 5.6.1 Benchmarking ................................................................................................................................... 42 5.6.3 Activity Mapping .............................................................................................................................. 43

Bibliography ..................................................................................................................... 44


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Executive Summary

This report analyses the current corporate and international strategies of Qantas

airlines, which is currently targeting growth strategies through both vertical and

horizontal integration and expansion internationally through different methods

including partnerships and the opening of subsidiaries and hubs, the choice of which

depends on the level of resource commitments and market size. There is a clear

recognition that Asian markets are rapidly growing and very attractive, but Qantas’

international standing is currently at a disadvantage in several aspects which include

high costs, competition and government-subsidised competitors. In conjunction with

these disadvantages are other constraints specific to Qantas, and revolve around

financial limitations the trouble they may have in outsourcing expensive functions

while maintaining a positive Australian image and brand, an important factor to

conserve as their domestic operations are extremely important as a source of income

and require conservation.

In order to move into this market and be competitive, it is suggested that

diversification strategies be used to acquire or establish a subsidiary overseas that is

located within the target country. Since an international hub is desired, the destination

could be a major development in the form of a hub in one the growing industrialised

economies, such as India in this instance. This would provide access to lower input

costs but also be developed using similar organisational infrastructure to Qantas, an

aspect where Qantas’ current capabilities and knowledge could be very valuable. By

offering complementary services but doing so over a global strategy, costs could be

reduced and Qantas could have a competitive player in this new market. As finances

would be tight, its suggested that local (Indian) investors be sought, along with a bond

or rights issue to current shareholders who are attracted to a higher/risk return

portfolio, in order to maintain control. Having investors, several support functions and

development of this airline in India may reduce governmental resistance, and the use

of experience to create a more localised or relative branding may attract customers. A

partner hotel service could also be established which may increase brand awareness,

be in a position to be used synergistically by this new airline and Qantas, be able to

capture this growing corporate market and finally have the ability to ensure customer

satisfaction through a consistent standard of service.


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Qantas – A Strategic Plan

Qantas is an airline that operates domestically and overseas. This report will highlight

and discuss how Qantas’ current mission, values and resulting strategies influence

their direction on different scales. Upon analysis of key opportunities arising from

changing environments, markets and other influential forces, strategies will be

suggested that align with both past approaches and behavior and the desired future

objectives, goals and directions, whilst considering the capabilities held by Qantas

and how they can be exploited to create a competitive advantage.

Interpretation

For strategies to remain effective and be accepted at all levels of the organisation, it is

important that they align with the core value and beliefs held. Qantas’ business

practices statement (Appendix 1.1.1) communicates the values and behaviours that

are encouraged, especially the value of safety and acting responsibly in legal, social,

environmental and risk management contexts. Desired behaviours support safety,

service, collaboration, integrity and innovation. Current strategies can also indicate

Qantas’ objectives and goals and suggest the ways in which they can be fulfilled.

Current corporate direction - As a result of its size and resulting economies of

scale, Qantas has been able to pursue growth strategies through targeted yet prudent

investment. This has come in the form of integrating backward by establishing or

internalising suppliers such as Q-catering who produces meals, and forward through

the online selling of tickets. Further horizontal integration is important for Qantas, as

they continue to expand services to different geographical locations (appendix

1.3.1.1). There are also instances of diversification. Usually of a related nature,

examples include Qantas freight and partnerships with other travel services, wherein

existing capabilities were transferred into similar industries or market segments

respectively. This may be considered similar to a portfolio strategy, where supply or

distribution functions have been internalised in scenarios where it is more beneficial.

Current international Direction - Qantas, currently based in Australia with hubs in

various locations have exercised caution, with incremental expansion or partnerships

used to gain entry into new markets, in recent years targeting the growing demand in

Asia (Appendix 1.2), with the establishment of a Jetstar subsidiary in Asia an

example. Qantas’ international performance has been lower, despite some

geographical advantages in operating from an established and competitive industry.


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Assessment

While there is rather extensive vertical and horizontal integration, related

diversification and rather extensive internationalisation, there may be more room for

development in order to take advantage of environmental changes and opportunities.

Qantas’ strategies, areas of underperformance and already recognised opportunities

can be used as a basis for the designation and implementation of new strategies.

Figures 2.8-12 (appendix 3.4), offered by Qantas, show a clear desire and focus on

improving international performance, with an ongoing emphasis on becoming

competitive and profitable in a growing Asian market. Qantas may wish to find a way

in which it can use its capabilities to provide a cost-effective solution for the growing

premium and corporate customer segment in Asia including the creation of an

international hub, which signals a willingness to make a reasonable investment.

Problems already identified include higher costs and potentially protectionist

governments. Another potential approach to expansion is to use current capabilities to

diversify further into other related industries that may complement Qantas. As done in

the past, similar and even further functional integration could be used to address the

problems of product inconsistency where beneficial and cost-effective.

Explanation

In order to become both competitive and profitable in this desirable Asian market,

certain measures may need to be taken that can both preserve the quality of service

but operate on a more competitive price base. Problems of higher cost have been an

issue over time, with public backlash over suggestions of outsourcing certain

functions to cheaper overseas firms, despite this much higher cost base than

competitors. Ultimately, outsourcing functions may not be an option if Qantas wish to

preserve their domestic image of an Australian airline. This gives rise to the

suggestion that diversification into different offshore services may offer a cost-

effective alternative to compete overseas. If Qantas were to acquire or establish a

subsidiary airline overseas along with the necessary support functions that Qantas has

itself integrated domestically, they may be able to transfer many of their capabilities

into a new profitable venture. By combining new geographic advantages including

low input costs in functions such engineering and maintenance, food production and

Human resources with a strong established value network and a standardised product,

Qantas may be able to operate a globally sourced airline with a truly global strategy.


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They could use their collective experience from operating in an advanced market,

their state of the art IT infrastructure and assets such as aircraft to potentially create

and advantage. For example, Qantas could use their experience and knowledge to

market a brand with similar ‘local’ characteristics the flying kangaroo icon.

Furthermore, a strategically placed hub in, for example, India would provide the

advantages of a gateway to Europe as desired by Qantas. Similar to the expansion of

Jetstar into Asia, the seeking of investors in local area through perhaps a bond issue

on the capital market where Qantas is in good standing, along with a rights issue, may

reduce financial pressure and, in conjunction with the localisation of several

functions, may reduce the potential for government interference or resistance.

‘Pride’ airlines communicates a standard of quality of

service, while incorporating the colours of the main

countries of operation. Along with a name and lettering that

relate to the target market but don’t overstate it, it attempts

to evoke an attachment to the host country, and encourage

local customers.

In a move that is perhaps more risky, Qantas could also diversify further into related

industries that serve this new market. Qantas has many partnerships with supporting

services such as hotels and car services, but there may be an opportunity to integrate

these services into their value chain if an influx of customers into this local market is

expected by their entry. If they were to establish a hub in India, a supporting hotel

accommodation service may also complement services. A ‘Pride Hotel’ would

increase brand awareness and be able to be endorsed and used synergistically by Pride

airlines and Qantas, capture this growing corporate market and ensure customer

satisfaction through a consistent standard of service. Here, fewer capabilities held by

Qantas would be of assistance and further consulting and research would be required,

thus increasing risk and cost. Although this may appear contradictory to current

strategy, as it doesn't represent investment in core assets, the current return for

shareholders is not overly large and so, from a portfolio perspective, a higher

risk/return investment may appear reasonable as discussed in appendix 3.4 (fig 2.11).

Evaluation

To accurately judge the viability of these strategies, the relative risks and

opportunities of each should be analysed. Different facets of each strategy and the


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relationships between the strategies introduce different opportunities and risks. Pride

airlines may be in an excellent position to benefit from Qantas’ experience and

capabilities but also the locational and cost advantages of being located overseas

while fulfilling other goals of Qantas including providing a hub, lowering cost of

capital and penetrating this growing corporate market. Brand consistency and

recognition can also be increased through the introduction of Pride hotel, which may

also create synergies if coordinated with the airline. Disadvantages of these joint

strategies, as discussed, focus on the concentration and size of the investment, local

competition and conflicts that may occur between Qantas and Pride, requiring them to

coordinate with each other and Pride hotel.

Expansion method – In terms of expansion, Pride airlines’ market penetration

strategy encounters two main constraints (appendix 4.1.1). Pride may face retaliation

through price wars if competitors are strong enough and perceive a credible threat.

However, high market growth is less likely to encourage retaliation, and Qantas’

capabilities and diverse sources of income can subsidise competition if necessary in

the short term. Legal constraints refer to the willingness of governments to intervene

when anti-competitiveness is perceived. Pride is a foreign body, and so the danger

that protectionist policy implementation is a risk. However, India’s increasing foreign

investment and Prides initially small share may make entry less threatening thus more

successful. A greater market share, increased overall economies of scale along with

experience curve benefits can result from this penetration strategy.

Pride hotel would be an example of a new product or service (appendix 4.1.2). While

there is a potential to utilise current capabilities this can be limited, expensive and

risky for at least two important reasons. The requirement for new strategic capabilities

and research introduce more risk related to coordination, complexity and uncertainty.

Project management risk relates to delays and is also another factor, meaning it may

be preferable to acquire an existing firm so as to reduce coordination issues.

Outsourcing - An important distinction to make is that, although support functions of

Pride airlines will be based overseas and globally sourced or located, they may not be

outsourced, as there is a risk that opportunism costs can outweigh savings made, and

so it may be wise to keep certain functions internal, similar to Qantas (Appendix 4.3).

Global sourcing – This venture would be a distinctly global strategy, which centres

around the advantages of having the ability to use Qantas’ international network to


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source different inputs at competitive prices from the most appropriate suppliers,

while recognising the associated complexity and coordination issues (appendix 4.4).

Location and entry - PESL and CAGE analysis, contrasted with the reactiveness and

clout of defenders (appendix 1.3.1.3) reveal an equally high risk and reward profile

(fig 2.11). This profile, and the entry method and establishing a subsidiary (appendix

2.2.3), corresponds with a very large investment which offers an opportunity for

increased control and return, but greatly increases risk.

Justification

Qantas must ensure it has the appropriate capabilities in order to facilitate the

implementation of these strategies. Qantas appears to have a rich number of resources

and competences, which can be transformed into capabilities (appendix 5.1).

Resources include Qantas’ extensive and recently upgraded fleet, IT infrastructure

and human and financial resources. Competencies of Qantas include organisational

knowledge and experience (appendix 5.3), financial standing and reputation and value

network (appendix 5.6.2). Capabilities such as organisational knowledge, upon which

Qantas will heavily rely for early coordination and strategy implementation, could be

considered dynamic (appendix 5.4). To identify strategic capabilities, different

methods can be used, such as benchmarking. In this case, average industry returns

(appendix 5.6.1) or customer satisfaction levels can be used to determine CSF

performance compared to competitors. In contrast, value network analysis can be

conducted, which in this instance would reveal the value that Qantas can offer Pride

(through parental analysis) along with identifying the functions that would benefit

from integration. By financing through a mixture of internal funds and seeking further

local investment, Pride airlines and its hotel may have a combination of capabilities

that make them capable of competing successfully.

A global strategy that utilises global sourcing and simultaneously makes use of

Qantas’ capabilities and current international position and network could produce a

service that is competitive in both quality and cost factors while meeting the

objectives and goals of Qantas on an international scale without risking Qantas’

Australian position and image. The introduction of a hotel can be a good way to

diversify, capture this newly identified market and provide an opportunity for

development and income source, which if financed through a combination of cash and

debt, can lower risk, while taking advantage of potentially positive returns.


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Appendix

1.0 Interpretation

Clear strategic interpretation of current corporate goals and direction.

Before an analysis can be conducted into the future direction and corporate and

international strategies of QANTAS, the current goals and direction need to analysed

and recognised. This can assist in the development and implementation of future

strategies, as alignment with such current direction and culture that both inform and

can complement each other, can lead to better overall effectiveness.

1.1 Corporate level directions

The General current corporate goals and direction can be found by analyzing the

factors which Qantas values. A useful tool for this is the overview of group business

practices (Qantas Practices statement 2013). Lacking a vision statement for QANTAS

and its subsidiaries as a whole, this lists the values and goals of different units within

the QANTAS group. It outlines values, behaviours and principles, different policies

and further explains the ways in which business, risk and shareholder engagement is

conducted and managed.

1.1.1 Principles, behaviours and values

These are described as the non-negotiable business principles, which, in connection

with behaviours and values, guide how we undertake business and make decisions.

They include a priority given to safety along with the compliance with laws and

regulations. This is complemented by a commitment to act and treat others with

respect and honesty, encourage environmental sustainability and to actively manage

the Qantas brand and the various risks the business faces. These are the foundation of

all group policies, the understanding of which is continuously reinforced.


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Along with these principles are other desired behaviours, which demonstrate the value

placed on safety, service, innovation, collaboration and integrity. There are several

policy documents that further build upon and expand these principles and desired

behaviours. It’s suggested that this group

practices overview should be considered

in its entirety, as each individual unit has

its own

1.1.2 Current Direction/ Strategies

After considering the values and desired behavior, their practical manifestation

through Qantas’ strategies can be seen through analysis and consideration of current

activities and their direction and objectives.

On the corporate level, the large size of Qantas and its different units or subsidiaries

result in what could be considered a combination of directional strategies, with

different units pursuing different objectives relative to their general and competitive

environments, the associated growth rates and life cycle stages, among other factors.

In this context, a number of differing strategies are being focused on simultaneously.

These are groups of activities which, in this case, can amount to a portfolio strategy,

where product lines and business units are managed and assessed individually in the

way that maximizes over performance. Some of the different strategies can be

discussed with their effects analysed to help explain why the decision was made.

QANTAS GROUP BUSINESS PRACTICES 3

NON!NEGOTIABLE BUSINESS PRINCIPLES The Qantas Group has eight Board approved Non-Negotiable Business Principles (Principles), which together with our Behaviours and Values, guide how we undertake business and make decisions. The Principles are:

1. We are committed to safety as our !rst priority

2. We comply with laws and regulations 3. We treat people with respect 4. We act with honesty and integrity,

upholding ethical standards 5. We are committed to true and fair

!nancial reporting 6. We are committed to environmental

sustainability 7. We have a responsibility to safeguard

Qantas Group reputation, brands, property, assets and information

8. We proactively manage risk.

The Principles are the foundation for our Group Policies. A supporting mandatory training program ensures that the Principles and Group Policies are understood and consistently applied in the business.

QANTAS GROUP BEHAVIOURSThe Qantas Group’s Behaviours are:

Safety — all of our people have a genuine commitment to safety.Service — we demonstrate our ‘can-do’ attitude and deliver on the customer promise.Innovation — we challenge the way things are done and take ownership for !nding a better way.Collaboration — we work with others to create a winning culture and an enjoyable place to work.Integrity — we are open, always listen and speak with honesty and respect.

The Group Behaviours are underpinned by business unit level values which re"ect the unique culture and brands of Qantas and Jetstar.

Qantas Values Qantas’ Values support better connections with our customers and people. Qantas:

�3 Cares;�3 Is forward thinking;�3 Has wisdom of experience; and�3 Represents the best of contemporary Australia.

Jetstar Values Jetstar’s Values support its strategic vision of being the ‘World’s Best Low Fares Airline’. They are:

�3 Be responsible;�3 Be energetically ef!cient;�3 Be consistently can do; �3 Genuinely care; and �3 Passionate about enjoyment.

PRINCIPLES, BEHAVIOURS AND VALUES

Our Business Principles, Behaviours And Values


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1.1.2.1 Growth strategies – integrations and diversification

Both internationally and domestically, Qantas airlines are pursuing carefully targeted

growth strategies based on concentration or market penetration through horizontal

integration, along with related diversification centered around the use of capabilities.

Horizontal concentration is in the form of an increase in the number of geographic

locations and range of products and services offered. Amongst other things, this has

been achieved through investment in a newer and larger fleet, the expansion of routes

into growing and attractive markets, and the establishment of partnerships with other

international and regional firms that a have strong footing in other international or

national markets that would otherwise be hard to penetrate, such as the partnership

agreement with Emirates which complements Qantas’ services. The achievement of

these objectives is dictated by the business practices overview discussed above.

Subsidiaries of Qantas and their current directions differ, such as Qantas defence,

which has undergone a complete retrenchment, with its sale to Northrop Grumman

(Janes 2013).

This divestiture, according to CEO Alan Joyce, is in line with the airlines strategy of

selling off non-core assets.

Another subsidiary, Q-Catering, is an example of Qantas ultilising vertical integration

concentration to acquire and internalise inputs that are in the value chain. Q-catering

and a related company, Snap Fresh, who produce the meals provided, were acquired.

This centralised meal production, allowing further expansion into other similar

markets for food production and is a visible exercise of concentric, or related,

diversification.

Furthermore, in a display of capability-based diversification, Qantas freight also

operates Australia’s largest independent air freight service. Its operations are mainly

domestic with major linkages with China and the United States, with various services

and facilities for transporting perishable, fragile belongings and valuable goods.

Qantas’ overall strategy, guided by the business practice documents, relies on their

ability to build on and use existing capabilities to engage in both concentration and

diversification strategies which integrate both forwards and backwards while utilising

and deploying assets in related industries in order to secure value and resources

respectively.


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1.2 International-‐level direction

In close relation to the corporate strategies being followed, the international-level

strategies pursued by Qantas are very established and follow a distinct path in terms

of the reasons for internationalization, current geographic advantages and market

selection and entry methods.

1.2.1 Drivers of Internationalisation

Reference to Yip’s framework can be made (Yip 2003), where different drivers of

internationalisation seem to favour the expansion of airline services to an international

scale. ‘Market’ drivers refer to the ability of the organisation to offer their product or

service on a global scale, and so relates to the level of demand provided by

international customers, the level of standardization amongst these customers’ needs

and the ability of Qantas to transfer and replicate their operations, activities and

marketing across these borders.

‘Competitive’ drivers, alternatively, refer to international integration over simple

internationalisation, a concept that has two important factors.

The growing associated interdependence between countries gives rise to an increase

in pressure to coordinate globally. This means that operations or events in one country

can greatly influence those in another country both positively and negatively, and so

require attention. The second aspect, globalised competition, refers to the actions of

other organisations or competitors in the environment who may be pursuing

concurrent international strategies. This may increase pressure to adopt a similar

position in response to such moves, especially since such strategies may result in

organisations using success in one location to subsidise and increase competition in

another.

This is reflected by Qantas who rely somewhat upon its success domestically to assist

in and bolster international operations, along with the recognition that global

operations and coordination are important for an airline to remain competitive.


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The third driver, cost, also favours Qantas, in that economies of scale can be achieved

through the spreading of resources and increasing volume beyond what could be

achieved within Australia. Furthermore, different operation can allocated to specific

countries where saving could be made. For instance, servicing and some

manufacturing can be outsourced to less expensive Asian or African countries, while

other more technical infrastructure can be sourced from specialised firms throughout

Europe or the United States. Lastly, by the their very nature, the logistics involved in

running airlines favour internationalisation, as international travel is a required and

important capability.

Lastly, ‘Government’ drivers can both inhibit and facilitate internationalisation. This

involves elements such as tariff barriers, technical standards, subsidies to local firms,

ownership restrictions, local content requirements, intellectual property regimes and

capital flow controls. In realtion to this, the level of economic openness in other

countries wil help determine the viability of internationalisation. In this case,

problems could be encountered in coutnries where national carriers are supported, in

which case partnerships may be preferable. In Qantas’ current case, government

drivers in different countries are usually independent, and therefore require

assessment to determine the viability of entry.

This has resulted in Qantas supplying a service to selected countries which have

attractive governmental drivers, amongst the other factors discussed, while again

working with firms in other countries that offer complementary services.

1.2.2 Sources of advantage

The current sources of advantage can be determine with the help of Porters

Diamond

1.2.2.1 Porters Diamond

Porters diamond suggests that geographic advantages can be achieved through or due

to several factors (Porter 1990).

‘Factor conditions’ relate to conditions and factors that go into making the product of

service. Favorable factors conditions at a national level can generate a competitive


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advantage internationally. For Qantas, the sustained growth of the Australia economy

and the associated high competition yet profitability have allowed Qantas to grow

with an attractive asset base and brand.

Secondly, Home demand conditions, as just mentioned, can be a source of

competitive advantage, where dealing with high and complex customer demands has

led to an ability to offer a quality product and service. These local conditions have

allowed Qantas to grow their brand and reputation, along with allowing it to diversify

and integrate in different ways as discussed earlier, leading to greater value creation

in areas that would otherwise be more costly, unpredictable or outsourced or less

organised or established.

Thirdly, related and supported industries can be a source of local advantage in that

Australia has well-established infrastructure in major cities to allow for their

operation. Although Qantas’ main assets, aircraft, are sourced from overseas, most if

not all other supporting inputs are close at hand locally or through positive

relationships with other organisations. This includes information technology and

infrastructure such as airports along with other inputs such as fuel, human resources

and widespread access to utilities and internet.

Firm strategy, structure and rivalry is the final factor and relates to the local strategy,

structures and completion in local environments, which in themselves can create a

basis for advantage. As previously discussed, some domestic rivalry can be an

advantage, as in this case where Qantas has been forced to remain competitive and

innovative after being privatised then later facing strong competition offering very

similar products and services.

1.2.3 Current value network advantages

Along with the advantages provided by home domestic industries, there is also a

possibility of building advantages through the international value chain. This relates

to the different factors that highlight how different skills, resources and typical costs

can be coordinated and exploited to conduct different operations in regions that

maximise efficiency and effectiveness.

Cost advantages relate to the differing costs of factors such as labour, transportation

and communication, and how the organisation can use their size to move different


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roles to countries that are lower cost. In this case, a prime example in relation to

Qantas is the shifting of lower-skilled jobs to overseas locations. This, however, has

been exercised with caution, as quality and brand and performance may be decreased

if costs savings are not recognised when over consequences are considered.

Unique local capabilities are another factor which relate to the ability of Qantas to not

only build upon their own existing capabilities domestically, but the possibility of

developing new capabilities by drawing on those found elsewhere in the world. In

Qantas’ position, a capability may be their relationship and reputation with suppliers

from which they can source aircraft. Furthermore, there may be general capabilities

establishing collaborative partnerships with overseas firms, specifically airlines,

where the forming of mutually beneficial contracts can be a source of advantage.

Finally, national market characteristics can further allow Qantas to create

differentiated products. Although this would usually come in the form of diversifying

products using the capabilities of overseas organisations and industries, such as

offering a low-cost alternative made in another country, typically in Asia or Africa. In

Qantas’ case, however, there doesn't appear to be much of these activities with the

two main services, Qantas and Jet-star airlines, both based in Australia with overseas

expansion not yielding many new or unique products through diversification.

Overall, Qantas has used its access to international markets to create value through its

ability to network and collaborate with other firms. This, however, can lead to the

creation of complex networks of relationships between organisations and within

Qantas itself.

1.3 Current International Strategy

As with every internationalised organisation, Qantas faces the global-local dilemma

through their expansion. This relates to the extent to which their products and services

can be standardised across the different national boundaries in which they wish to

operate. In Qantas’ position, markets tend to demand a similar service, offering

advantages in terms of economies of scale and centralisation of some activities. From

this concept arises the potential for organisations to follow different strategies that

bear this problem in mind (Figure 2.1). Companies will often change between

strategies, often influenced by the drivers previously discussed. Qantas appears to be


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following either a complex export or a global strategy, predominantly due to the

standardised nature of the service they offer.

Complex export strategies involve the location of most activities in a single country,

but with economies of scale still possible in some areas such as manufacturing and

research and development. In this instance, some local advantages of the home

country are retained, but the building of a stronger brand and networks overseas are

still sought.

Global strategies, alternatively, is arguably the most advanced international strategy.

By utilising value networks to the full, dispersing activities throughout the world

when necessary and choosing geographical locations based on their individual or

locational advantages, the optimum locations can be utilised for different functions.

Figure 2.1

Four International

Strategies

Configuration of Activities

Dispersed Concentrated

Coordination of

Activities Low Multidomestic Simple export

High Global Complex export

Qantas appears to be a combination of these two, in that much of their operations are

based in Australia, while the Qantas and Australian branding, along with asset

procurement, are done on an international scale. However, they do appear to be

taking a global approach, in that inputs are sourced from different countries are

chosen when advantageous, but in most cases operations are best conducted

domestically in a centralised fashion. This can be due to local capabilities such

knowledge and skill, along with the desire to maintain a local image, may mean that

certain functions are kept domestically.


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1.3.1 Market Selection strategies

When considering the different goals and direction of Qantas, it is important to

consider the method by which countries are selected as viable areas that can be

operated in effectively in conjunction with corporate or international strategy.

In Qantas’ case, it is possible to analyse current areas of operations and their

associated or common characteristics to determine the organisations direction and the

type of environment being sought for expansion into.

PESL (Political, Economic, Social and Legal) and CAGE (Cultural, Administrative

and Political, Geographic and Economic/ Wealth) frameworks can be used to analyse

different characteristics of the countries in which Qantas operates which can be

contrasted with the associated degree of competitive rivalry in that environment.

From inspection and earlier discussion, it is clear that Qantas’ strategies are currently

focused on expanding into nearby growing markets in South-East Asia and New

Zealand, along with other established markets in popular destinations where demand

but also competition is very high, such as routes to Western European countries and

the united States.

1.3.1.1 PESL analysis

When a PESL analysis in conducted in these regions, a common factor is the Political

support for international trade free of most restrictions, with some countries like

China requiring some caution, such as the recent expansion of Jet star into that area.

This is similar to the Legal aspects that can be analysed in the countries that

operations have been conducted, in particularly the extent to which contracts and

other relevant law can be enforced, along with similar controls to manage crime and

corruption and ensure safety. This may be a contributing reason as to why few

services are offered in areas such as South America.

Secondly, the Economic condition in different countries can effect the financial risk

and market demands associated with a country. In particular, different measures can

be used to determine the size or growth of a country, with positive economic growth

being attractive and an incentive to enter the country, as the corresponding demand


18

increases as air travel become more affordable to more people. Furthermore, and of

great influence to Qantas, is the value of foreign currency relative to Australia’s,

whose high value has resulted in the high price of exporting the Qantas product and

service, and thus has resulted in either a potentially weakening demand or similar

losses through having to reduce prices.

In Qantas’ case, their internationalisation seems to be following directions towards

both established and popular destinations and growing economies, with any risk in the

latter outweighed by the chance to secure a share in potentially large and growing

markets. This in indicative of the current move into South-East Aisan markets along

with destinations in strong, established economies.

Social factors also appear to follow these trends across the current directions and

locations that Qantas has moved into. Relevant market segments that are the target of

strategies include business customers and middle class individuals and travellers. In

this respect growing , industrialised and already advanced countries will contain the

relevant demographics that are targeted.

It can be seen that there’s a correlation between the areas considered advanced and

industrialised by the IMF and those served directly by Qantas.

(Fig. 2.2) Advanced economies (IMF2012)

(Fig 2.3) Industrialised economies (Bożyk 2006)


19

(Fig 2.4) Direct area of operations (Qantas Strategy Day 2011)

(Fig 2.4.1) Qantas Network (Our network 2013)

(Note: white points may indicate cluster of destinations) 1.3.1.2 CAGE Analysis A CAGE analysis helps to analyse the compatibility between a company and different

countries through the consideration of different dimensions of distance.

‘Cultural distance’ refers to differences in language, ethnicity, religion and social

norms. Including the clear potential for differences in consumer taste that arise out of

these characteristics; this also applies to managerial behavior and internal

relationships. Although operating in several locations, Qantas operates and is

A clearly superior international network

• Optimising the existing Qantas network • Using alliances to bolster and expand reach • Asia - supplementing the network to grow with our customers

88


20

managed generally from within Australia. This may lead to issues regarding

alignment with expectations of other international cultures. However, there is a

relatively consistent expectation of professionalism to a degree where smaller changes

can be made to tailor services to different cultures and customers.

‘Administrative and Political Distance’ refers to a distance that is manifest in

incompatible administrative, political or legal traditions. This refers to the history and

relationships shared between different nationals and the understanding that can arise

from or lack because of these links. Being a relatively younger country with people of

European origin has meant that Qantas has been able to relate to these countries,

while being in a closer geographic proximity to South-East Asian assists in the

maintenance of relationships.

Geographic distance is another factor that requires consideration. Here, the distance

separating countries is considered, along with differences that relate to the geographic

nature of countries and the problems that can arise. In most circumstances, this would

relate to ways in which logistics would be coordinated, and available infrastructure. In

Qantas’ situation, there are few geographical limits placed upon them due to the

nature of their business. Because of this, and the availability of required infrastructure

in most destinations in the form of airports and various other inputs, those locations

nearby and within reach of services from Australia have become strategically

important to Qantas.

Economic factors relate to the ability of Qantas to serve customers and markets of

differing wealth. In this case, its argued that multinationals from rich countries can be

weak at serving customers in poor or low-income areas. However, the development of

capabilities to serve this large number of low-income markets can be very beneficial

and beneficial. It fairly clear in Qantas’ situation that the, as of yet, have no ability to

serve these markets, as evidenced by their focused on more developed nations with

larger bases of wealth.

1.3.1.3 Market-‐ Competitor retaliation

Lastly, these more general factors can be contrasted with the more specific

competitive environment, in particular the degree to which competitors react to entry

which can be effected by the importance of a certain country to a competitors


21

strategies or source of advantage. Secondly, the power with which competitors can

retaliate is also important. Usually measured by market share, size or available funds,

these can be supported by protectionist governments and other local factors. An

example of this is shown below (fig 2.5), with increasing attractiveness having

somewhat a correlation with the degree to which competitors will react and work to

protect markets. (Macmillan, van Putten & McGrath 2003)

Fig 2.5

1.3.2 Market/ Nation entry Method

Lastly, after consideration and analysis of global strategies and how international

markets were selected to compete in, the determination of the entry method used in

these countries is required, as it helps determine the amount of resources, planning

and investment required. Therefore, entry methods will require and upon

implementation will result in different levels of resource commitments to the different

markets and the degree to which involvement is required in each location.

The staged internationalisation model suggests that this process of internationalisation

comes in the form of a gradual increase of commitment supported by the knowledge

and capabilities that are simultaneously built up over time through experience

(Erramilli 1991). It therefore emphasizes the importance of experience in determining

the appropriate entry method. This is a way to minimize asset exposure by gradually


22

increasing investment over time as important local and organisational knowledge is

increased.

Different factor will determine the most appropriate form of entry (fig 2.6). One of

two important factors to consider include the breadth of competitive advantage, which

is the degree to which Qantas can rely on their own capabilities, or whether it must

seek further partnerships locally or other new sources of capabilities.

Secondly, tradability refers to Qantas’ ability to rely on trading relationships and

relies on the ease of transport between home and target countries, and the quality of

legal protection. Therefore, tradability is low where it is unsafe to operate and rely

upon enforceable contracts with local partners.

In Qantas’ situation the provision of services can be analogous with either export or

joint venture methods.

Exports are suitable where goods are easily transported between countries and there

are sufficient domestic competitive advantages in order to minimise local reliance.

Similarly, joint ventures and alliances work where advantages are narrow, but local

reliance is low. Alliances, such as those with other airlines, ensure that the partner has

an interest in maximizing performance.

In this case, the ability of Qantas to deploy assets overseas easily results in little need

to establish subsidiaries overseas, with coordination of operations able to be

conducted centrally. This can be complemented, as discussed, by alliances with

organisations in other markets that are mutually beneficial for both parties.

Fig 2.6

modes of international

entry

Tradability

High Low

Competitive Advantages Broad Export

Wholly owned

subsidiary

Narrow

License/

franchise Joint Venture/ Alliance


23

2.0 Assessment

Analysis of the current direction and strategies is a good way of determining where

Qantas is at the moment. In furtherance of this analysis, potential directions and

opportunities for future development can be assessed, along with the optimum method

of implementation and the advantages and disadvantages of the different strategies

suggested.

2.1 Corporate strategic opportunities

2.1.1 Directional – Growth

Throughout analysis of current strategies, there were several different areas in which

opportunities may exist by undertaking a combination of strategies, but they were

otherwise underutilised or not considered.

In terms of growth strategies, different objectives were being pursued simultaneously,

some of which can be categorized as increased integration or diversification.

2.1.1.1 Integration

There are already some examples of vertical forward integration in the form of

Qantas’ implementation of online direct online ticket sales, removing the necessity for

travel agents. Furthermore, their direct contact with customers, save for airport

facilities, is rather broad, and so there doesn't appear to be many other opportunities

for such integration.

Alternatively, backward vertical integration is manifest in the form of subsidiaries

such as Q-catering, the airlines food supplier, and Human Resources to a degree,

where there are large investments in pilot training and the Qantas Centre of service

excellence that facilitates the cross functional coordination and collaboration and

recruitment, training and development of employees (Qantas centre 2013)

The acquirement of Express Ground Handling, which manages luggage transport to

Jetstar and other regional airlines, is another example of such integration where

Qantas has taken over certain roles in the distribution of services to customers.


24

The securitisation of these inputs could be an effective way of creating an advantage.

Other important inputs to consider include fuel, research and development and other

longer-term assets such as aircraft and information technology infrastructure.

2.1.1.2 Diversification – Related

Currently, Qantas is highly diversified in related industries both in a constrained and

linked sense, specifically relating to partnerships and alliances in services of different

air travel markets internationally and associated services such freighting activities, car

rental, travel insurance provision, and partnerships with hotels and other businesses to

create packages for holidays and specific events. Further expansion in this sense may

move towards strategies such as opening or acquiring wholly owned subsidiaries in

place of such partnerships. Using capabilities such as organisational knowledge about

destinations, current and growing customer demographics and demands and a medium

through which they can communicate with customers, there could be a way to expand

services to this holiday and air travel market.

2.1.1.3 Diversification – Unrelated

There is little diversification here that is unrelated to the currently held competencies

of Qantas. Although there is little room for expenditure on non-essential investment, a

restriction reflected in the current strategy of divesting non-core assets (The

Australian 2013), there could be some possibility of opportunistic diversification if it

helps create value while not restricting current operations or strategies. This is

especially the case as the current return for shareholders is relatively small; with

overall profit of $6m this past financial year (Qantas News Room 2013).

This creates an opportunity to invest cautiously in other ventures, with the high

possibility of achieving a higher profit margin than is currently being made.

Despite the potential financial advantages of diversifying and looking for completely

new ways of creating value, such activities may take funds and other resources away

from the development of currently held capabilities of Qantas, an exercise which may

be detrimental in the long-term through the reduced reinvestment and thus potentially


25

reduced advantage. This lack of capability and advantage cultivation is, in part, due to

the very nature of unrelated diversification, where no capabilities can be transferred or

shared with the new direction, and so there is an increased degree of complexity and

little organisational knowledge to rely on. Lastly, the problems of such

diversification, especially in the opportunistic sense, includes the ambiguous nature of

such a strategy, in that an opportunity would have to present itself and therefore the

planned direction is difficult to articulate, recognise or manage using current

capabilities.

2.1.1.4 Diversification -‐ Capability-‐Based

Capability-based diversification appears to be a good option, in that specific,

transferable capabilities are focused on. In Qantas’ case, this may come in the form of

established organisational knowledge and infrastructure. These capabilities could be

transferred between the corporate unit and a new or existing business or another

combination.

2.1.2 Portfolio Strategy

In relation to the earlier discussed option of unrelated diversification in search of an

increased return, a portfolio strategy could be considered if it helps in the

identification of such areas where acquiring a business could add value. Here, Qantas

would have to seek a balance the different criteria upon which a portfolio strategy is

built, two of which being the attractiveness of business units in terms of their

individual strength and the profitability of their operations, and the ‘fit’ that these

business units will have with each other, a factor which considers the potential for

synergies and ability and extent to which the corporate parent will be able to monitor

and take care of them. Here, the BCG (growth share) matrix or the GE/McKinsey

business strength – industry attractiveness matrix could be used again to assess

different options as the present themselves (Hax & Majluf 1990)

The disadvantage of this approach is that, in being an exercise of unrelated

diversification is that it introduces more complexity without the ability to rely on


26

capabilities to manage it, and as such there is a level of uncertainty as to the area in

which Qantas could expand.

2.1.3 Parenting

The idea seeking of areas where capabilities can be transferred could likened to a

‘Parental’ strategy, wherein the developer seeks to employ its own central capabilities

to add value downwards to a business. In this sense, a ‘parenting opportunity’ would

have to be recognised or found, which is a business not fulfilling its potential but

which could be improved if introduced to Qantas’ capabilities. More common in the

case of related diversification, this could involve strategies related to other airlines in

markets that are still growing and developing. The introduction of advanced

infrastructure from Qantas and the value it could introduce through its international

value chain or network may prove very valuable against similarly lesser-advanced

competitors in an international or other national market that is relatively young. This

could be the case in areas such as central Asia or Northern African Countries or, more

specifically, countries such as India, which has a large population with growing

wealth and also offers a good location being midway to Europe.

2.2 International Opportunities

There are some correlations between the different potential international and

corporate strategies; this may be because Qantas has expanded internationally fairly

extensively along with the nature of their business that favors and encourages

servicing international demands and markets. The factors considered in the

formulation of an international strategy firstly relate to the analysis and recognition of

changing international drivers and how these, along with Qantas’ capabilities and

associated geographic and network advantages, contribute to determining the

appropriate markets to enter and the mode of entry and how these factors can effect

performance.


27

2.2.1 Market Drivers

As discussed earlier, a good staring point for expansion is to look for growing

markets, which in this case focuses particularly on industrialised countries. This

direction has been followed through the current focus on South East Asia. Drivers

appear to continue to favour expansion due to the standardised nature of Qantas’

product and the increasingly globalised, interdependent and open nature of both

governmental and competitive drivers. The last driver, cost, is a matter of concern, as

costs may be higher if some functions remain in Australia as previously indicated by

Qantas, instead of being subject to a global sourcing approach that places more focus

on cost and may result in outsourcing.

Although this may not be looked on favourably locally, there are other options which

can be considered, including the purchase or establishment of a subsidiary,

complementary airline under another name which does operate on a globally sourced

platform. This scenario and the marketing of this subsidiary would be similar to the

current strategy of having two connected yet uniquely marketed airlines in Qantas and

Jetstar.

2.2.2 Market Selection

Analysis of the markets Qantas has entered into revealed investment in established

and popular destinations, along with growing, nearby South-East Asian countries.

Increasing wealth and populations through these areas are good indicators and should

probably be followed in terms of market selection criteria, as growing markets and

established markets with high demand are clearly favorable for the opportunities they

offer.

In a similar fashion to the move of Jetstar into China, another offshore airline in the

market with greater focus on quality, not dissimilar to Qantas, would allow for such a

service to be provided at a lower cost to suit the environment and growing middle


28

classes of the region which includes India, China and Turkey, with an example brand

below.

Fig 2.7

This example (fig 2.7), ‘Pride’ airlines, communicates a standard of quality of service,

while incorporating colours of the main countries in which it may wish to operate.

Along with a name and lettering that relate to the Asian market but don’t overstate it,

the colours, similar to the Qantas ‘flying kangaroo’ symbol, may evoke an attachment

to the host country, and encourage local customers.

Importantly, this destination or hub could also serve as an outlet to other countries, a

role which is currently being performed in the United Arab Emirates in conjunction

with a partnership with Emirates airlines and Singapore prior to that.

2.2.3 Mode of entry

As discussed earlier (appendix 1.3.2), the mode of entry will depend heavily on the

resource commitments made along with operational involvement (fig 2.6), or the

amount of time or effort that is required or allocated. Furthermore, a staged

international expansion, as explained above, sees this as a sequential approach where

this internationalisation would and should be a gradual process that allows for

minimised asset exposure and local knowledge acquisition. However, there are

exceptions to this process, where ‘rapid globalisation’ occurs. Rapid globalisation

could be a viable option, if certain entry methods are used, as discussed below.


29

In this instance, entry methods could potentially be similar to that of Qantas, where a

competitive advantage of organisational knowledge and size and high tradability

through established value networks could allow exporting with a local, centralized

base. However, the desire to have the majority of operations overseas, located in

countries such as India in particular, may incline Qantas to establish a wholly owned

subsidiary. Through direct investment, the advantages are that Qantas are in full

control, rapid entry can be achieved if some local acquisitions are made

simultaneously to increase assets early and coordination and integration with Qantas

and its technological infrastructure is possible. The disadvantages of such direct

investment relate to the high levels of funds required along with the associated

commitment. Furthermore, the advantages perceived through integration and

coordination with Qantas may also increase inefficiencies, bureaucracy and costs.

The major weakness of this plan is the higher costs of the move, which involves the

acquisition of both fixed infrastructure in the form of engineering, training and

maintenance and storage facilities, along with aircraft, which represent a huge cost

before refurbishment is even considered.

In consideration of these costs, and the risks associated with having a majority of

services outsourced, the establishment of a subsidiary company could be

complemented by a new share offer, whereby existing shareholder receive the first

opportunity to purchase shares in the new subsidiary, and Qantas would retain a

majority in order to maintain relative control. This could also be performed through

debt issues such as bonds so as to retain 100% control. This would help spread the

risk that is probably higher than that reflected in Qantas’ current value and give

shareholders the opportunity to decide whether or not they want to invest in the

venture.

As mentioned earlier, this investment in a wholly owned subsidiary may allowed the

organisation to globalise rapidly, in which case they would fall into the category of

‘born global firm’. In this instance, the smaller firm could rapidly internationalise in

early stages due to the help of new technologies and their links with Qantas who is an

international identity with certain expertise and an extensive supply network. In this

instance, internationalisation is supported by Qantas capabilities and infrastructure,

along with the very nature of the service being provided; as an airline is expected to

travel outside and beyond the host country. As discussed under the different potential


30

corporate strategies, this potentially rapid globalisation could be complemented by the

establishment and internalisation of various other inputs as Qantas has done,

including Food preparation and Human resources, including pilot training and

services. This could potentially also be expanded to include some other services,

which Qantas currently benefits from in the form of partnerships. This would be a

great way to maintain and ensure consistent standards, along with providing the

ability to tailor such services such as food preparation, customer service and general

employment to local demands and to encourage local employment. The establishment

of a ‘Pride’ hotel, for example, would be able to help increase brand awareness, along

with providing a complementary service to Qantas by providing a location for

customers in need of accommodation.

2.2.4 Internationalisation and performance

In this case, regard must be had to the potential problem that could be encountered

when investment in internationalisation is increased or saturated in specific areas. In

particular, the Inverted U-curve model

suggests that there is an optimum level

of advantage and performance in a

given area through economies of scale

and locational advantages. With this

network, however, comes increased

complexity, the costs of which may

eventually exceed any benefit gained.

This model suggests that due to this

risk, moderate internationalisation usually leads to the best results. These

implications, however, have recently been criticised in situation some multinationals

have been increasingly successful at internationalisation strategies, with a large

proportion of sales coming from international sources. The airline business may fit

this alternative concept due to the very standard nature of the product and service

being offered, along with the small amount of fixed investment in infrastructure

required in different locations, allowing for the easy withdrawal, increase or decrease

in services in unprofitable areas.


31

3.0 Explanation

While the development of the above strategy may appear to be different to that of

Qantas’ current strategy and rather risky, there may be a good rationale that explains

why it is in the Qantas groups’ best interests to pursue such a strategy and that it is

aligned with the directions and goals of the Qantas group (Qantas Strategy Day 2011).

3.1 Move into Asia The strategic intentions of Qantas can be analysed is through the communicated

strategy, which has clearly indicated a desire to increase the long-term presence of a

premium quality airline in Asia in conjunction with Jetstar. This is because Asia has

been found to be the fastest growing market in the world that will, in the long term,

become the largest (fig 2.8) and an Asian hub has been seen as desirable (fig 2.11)

However, there are problems that hinder entry into this market including multiple

barriers and high competition (fig 2.10). Improvement in overall international

performance manifested in a return to profit has also been seen as a high priority (fig

2.9).

3.2 Funding Furthermore, the suggested method of financing may be in line with Qantas funding

strategy, which aims for improved debt access, liquidity, debt terms and reduced cost

of debt. Through use of the capital market where Qantas has a very favourable credit

rating and reputation, there is less need for leverage, and the desired prudent approach

that has been communicated can still be maintained, with shareholders ultimately

having the option of opting out of further investment or risk if they do not desire it.

3.3 Other related strategies There are other strategies related this desired performance which are not necessary

corporate or internationally focused, but include the reduction of costs through


32

methods including fleet simplification and upgrades to increase fuel efficiency and

should be considered. This procurement strategy is one of many functions that could

be performed effectively through coordination with Qantas and the use of their supply

network. Furthermore, costs could be reduced through the lower labour costs

associated with operation and centralisation in a country such as India (BLS 2013)

3.4 Alignment of strategies It could be argued that basing a subsidiary airline and the associated services and

functions overseas could decrease the disadvantages currently faced, such higher

comparative costs, government backed airlines and inconsistent product offerings (fig

2.10) through the outsourcing of functions, local branding and operation which may

decrease resistance and complete ownership as opposed to franchising or partnerships

respectively.

The Qantas branding and image issues and backlash that could be faced if functions

of Qantas were outsourced overseas were discussed in the previous report, but give

rise to the reasoning that if such costs cannot be reduced then it may be hard to

compete overseas, and so a global product may be suitable. By acting as a hub and

complementing the services of the Qantas airline, in conjunction with the

establishment of other diversified functions that contribute such as local food

preparation and hotel services, overall international performance may be effected

positively, which is a crucial objective of Qantas and one of the very few goals at

which they are currently underperforming in.


33

Fig. 2.8

Fig 2.9

fig 2.10

2010-2030 TRAFFIC Asia Pacific

Europe

Middle East

North America

Latin America

CIS

Africa

0 1,000 2,000 3,000 4,000 5,000

2010 TRAFFIC

Asia Pacific to lead in world traffic by 2030

Source: Airbus

28%

27%

27%

7%

5%

3%

3%

% of 2010 world RPK

20-year growth

% of 2030 world RPK

WORLD TRAFFIC BY AIRLINE DOMICILE (RPK BILLIONS)

5.7%

4.0%

3.3%

7.4%

6.1%

4.9%

5.6%

33%

23%

20%

11%

6%

4%

3%

20-year world annual traffic growth

4.8%

11

Build

ing

on o

ur st

rong

dom

estic

bus

ines

s

Qantas Group: 5 Year Measures of Success

•Add incremental value to the Group • Individual businesses achieve ROIC > WACC •Minimal capital requirements

•Maintain profit-maximising 65% market share •NPS: QA - relative NPS differential > 10%; JQ leading LCC NPS •QA: 90% OTP2

• Improvement in unit cost

• Top 2 LCC in Asia Pacific Region (by revenue) • Lowest CASK for each Jetstar branded airline •All new ventures profitable within 3 years

• 10 million QFF members •Partners in all areas of major consumer spend • 5-10% EBIT CAGR FY12-FY17 •Maintain breakage below 10%

PILLARS METRICS CURRENT RETURNS

• Short term: return business to profit •Relative NPS differential > 10% • 85% OTP • Improvement in unit cost

TARGET RETURNS

Growing Jetstar in Asia

Transforming Qantas

International

Profitably building on 65% market share through

dual brands

Deepening FFP member and partner

engagement

Growing our portfolio of

related businesses

Continue to strongly exceed cost of capital1

•World leading safety culture • 80+% of total workforce “engaged”

ROIC >

WACC

ROIC >

WACC

ROIC >

WACC

ROIC <

WACC

ROIC ~

WACC

ROIC >

WACC

Continue to exceed cost of capital and grow returns

Continue to exceed cost of capital

Improve return on capital1

Improve return on capital

ROIC >

WACC

ROIC >

WACC

ROIC ~

WACC

ROIC >

WACC

Deliver sustainable

and attractive returns to

shareholders

1. Long term financial objective for Qantas Airlines segment is to sustainably exceed the cost of capital on a combined basis

23 2. On Time Performance

The business needs transformation

STRUCTURALLY CHALLENGED • Extremely high levels of competition

Rise of Middle Eastern carriers Government sponsored competitors

• QAI - Asian network and schedule disadvantage • QAI - Cost disadvantage • Inconsistent product offering

STRUCTURALLY SOUND • Comparable cost base to competitors

• Competitive product offering

• No network or schedule disadvantage

• Strong partnership and alliance network

79

Japan

Europe

Africa

N America

S America

China

Aus

SE Asia

NE Asia


34

fig 2.11

fig 2.12

fig 2.13

Strengthening our position in Asia is critical

OPPORTUNITY ASSESSMENT FRAMEWORK • Pathway to achieve objectives • Attractive risk / return profile • Prudent allocation of capital • Leverage existing Group assets where

appropriate e.g. relationships, infrastructure, presence, experience

OBJECTIVES

• Service the growing portfolio of customers who are increasingly focused on Asia Includes existing Australian corporate

customers and new Asian customers • Operate a competitive Asian hub

Appropriate network, destinations, frequencies and operational infrastructure

• Rebuild market share to / from Asia

RATIONALE

• Qantas International is an end-of-the-line carrier Destination and frequency disadvantage Market share has declined from 39% to 14%

over last decade • An Asian hub is required to be competitive

Fastest growing aviation market in the world Increasingly vital market to our corporate

customers

92

Qantas International: Progress against strategic objectives to date Initial phase of transformation plan announced August 2011

PILLARS PROGRESS ACHIEVEMENTS TO DATE

Superior Customer Experience

• Implemented international Faster, Smarter Check-in at key trans-Tasman ports

• Extended A380 network to HKG • Commenced reconfiguration of 9 x B747 aircraft with award winning A380 product

• Commenced upgrades to premium lounges in LAX, SIN, HKG

Underlying Business Transformation

• Industrial Relations environment stabilised

• Reduced capital expenditure in business via deferral of 6 x A380 aircraft • Further optimised network - DFW in lieu of SFO; Santiago in lieu of Buenos Aires

• Continued transformation of cost base via QFuture

Strengthen Network

• Granted full ATI clearance for Joint Business Agreement with American Airlines

• Restructured and strengthened Joint Service Agreement with British Airways, reduced exposure to Europe

• Sponsorship of Malaysia Airlines into oneworld

Strengthen Asia

• Evaluating various options with key stakeholders relating to new Asian premium airline

work in

progress

93

KPIs: What does success look like?

PILLARS KEY MEASURES

Superior customer experience • Leading International NPS

• Superior employee engagement

Underlying business transformation

• Improvement in unit cost

• Leading International aircraft availability and OTP1

• Industry leading TRIFR2 and LWCFR3

Strengthen network • Greater network frequency on key business and premium leisure routes

• Greater number of ATI4 partnerships

Strengthen Asia • Greater share of Australia – Asia Corporate market

IMPROVE RETURNS ON CAPITAL (QANTAS AIRLINES5 SEGMENT TO SUSTAINABLY EXCEED COST OF CAPITAL IN LONG TERM)

1. On Time Performance 2. Total Recordable Injury Frequency Rate 3. Lost Work Case Frequency Rate 4. Anti- Trust Immunity 5. As defined in the 2011 Annual Report Note 2 (page 62). Qantas represents the Qantas passenger flying businesses and related businesses, and excludes Jetstar, Qantas Freight and Qantas Frequent Flyer.

81


35

4.0 Evaluation

4.1 Risks/ opportunities of expansion

4.1.1 Pride airlines

The creation of pride airline, although I completely new subsidiary, represents a form

of market penetration, in which existing markets are targeting with a somewhat

similar product. In this instance, the changes the service include a different brand with

an alternative internal structure and direction, but overall the service being provided is

consistent with Qantas’

fig 2.14

Products/ Services

Markets Existing New

Existing

Market

penetration

New products/

Services

New

Market

Development

Conglomerate

diversification

In the context of market penetration, this strategy builds on existing capabilities and

doesn’t require an organisation to venture into completely new territory, which allows

the exploitation of Qantas’ currently held capabilities and knowledge and resources.

Through this they can achieve greater market shares, and thus potentially increased

economies of scale and experience curve benefits. However, two different constraints

may be faced. Firstly, retaliation from customers is likely to occur if competitors feel

their market share being threatened. This could lead to price wars, as services in the

airline industry are rather similar and substitutable. However, strategic capabilities

such as the globally sourced nature of Pride airlines may means its costs are similar to

that of local competitors, a factor which, in conjunction with the quality IT

infrastructure and supply network offered through Qantas, may help sustain

competitiveness and performance.


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Legal constraints are the second consideration, and refer to the ability and willingness

of local governments and bodies to intervene in instances where the market

dominance of one organisation is seen as anti-competitive or potentially damaging. In

this instance, this potential could be greater since Pride is a foreign body, and the

danger that protectionist policies will be imposed is a factor to be considered. Despite

past highly protectionist policies being enforced by the government, certain events

have helped promote liberalisation (Wolpert 2003) and a slow moved towards a free-

market system (OECD 2007) by emphasising both foreign trade and direct investment

inflows (Alamgir 2008).

While there is always this possibility, the encouragement of foreign investment in

India, along with the fact that it is a growing market and Pride would not initially take

an outstanding market share, it may be possible to enter this market successfully.

4.1.2 Pride Hotel

The establishment of a local hotel which complements the services offered by both

Qantas and Pride, along with being endorsed by them, would be an example of a new

product or service. In this instance, product development includes any instance where

a new or modified product is offered, with the new offering being along a spectrum of

diversification. Here, similar customers are being targeted using similar distribution

channel through the Qantas and Pride brands, but the product being offered is

completely different. This form of related diversification due to the consistent

strategic target can bring about the potential to utilise current capabilities. However,

this exercise can be expensive and risky for at least two important reasons.

New strategic capabilities may e required to compete in such a new venture, and so in

order to remain competitive it may be important and worthwhile to seek advice or

information through consultants relating to facets that may be foreign to Qantas.

Typically, research into these areas and the following establishment of the hotel

represents a large investment along with new sources of complexity and uncertainty

in areas such as coordination and communication, which increase risk.

Project management risk is also another important factor requiring consideration.

Risks of delays over time are a real possibility, especially where monitoring is low. In

this instance, it may be preferable to acquire an existing hotel or business so as to


37

reduce coordination issues to include only the organisations internal design and

structure.

4.2 Diversification and performance

The issue of the appropriateness of diversification is also an important factor to

consider, especially with an investment of this scale.

It’s been suggested that there are some instances where diversification is not

necessary, and is sought for interests other than overall organisational performance,

such as managerial interest, short term goals and risk dilution.

Consequently, research suggests a general implication that firms seeking limited or

related diversification outperform those who remain specialised in one area and those

who diversify into unrelated areas. (Palich, Cardinal & Miller 2000) . This gives rise

to the reference to the ‘inverted U-curve’, as mentioned earlier. However, due to

contrary cases and real results of different multinationals, the ultimate conclusion is

that diversification is a process that needs to be researched and analysed closely to

determine the costs and benefits.

4.3 Risks/ opportunities of outsourcing

An important distinction to make is that, although the support function of Pride

airlines will be based overseas, they may not be outsourced specifically, as

subcontracting functions introduces new risks. In this case, it may be wise to keep

certain functions within the organisation, in a similar fashion to Qantas.

This is because the argument for outsourcing is usually based on the superiority with

which a specialised supplier can produce a product or service. However, it has been

suggested that a form of ‘transaction cost theory’ be considered over simple cost

comparisons. The ability of a subcontractor to take advantage of their position and act

opportunistically has been said to increase where there are few alternative

subcontractors, the product of complex and dynamic, making it hard to specify in

contracts, or where investments have been made into specific assets, with the


38

contractor knowing they will have little value if they withhold their product or

service.

Ultimately, there is a risk that opportunism costs can outweigh savings made, and so

if there are fewer alternatives if activities are complex/ dynamic and if they are

concerned with specific assets, then it may be better to integrate. In this instance, the

relatively foreign environment and complexity and dependency on different functions

result in the need to integrate functions into Pride airlines. As discussed, these may

include human resources, pilot training, engineering and maintenance, food

preparation and other support functions such as finance and accounting.

4.4 Risks/ opportunities of global sourcing/ strategies

The platform for the development of Pride airlines is the utilisation of global sourcing

to create the best and most cost efficient structure possible using global networks.

This would be a distinctly global strategy, the advantages and disadvantages of which

centre around the advantages of having the ability to use an international network to

source different inputs, while recognising the inherent complexity and coordination

issues that will certainly arise. This strategy relies heavily on global sourcing, which

refers to the exercise of purchasing services and components from the most

appropriate suppliers around the world regardless of location.

4.5 Risks/ opportunities of location & entry method

As discussed above at appendix 1.3.1.3 and displayed at figure 2.5, the combination

of PESL and CAGE analysis in regions such as India require contrast with the

reactiveness and clout of defenders. In this instance, these factors appear equally high,

and give rise to both a high risk and reward profile (fig 2.11). This profile, and the

commitment to such a decision is reflected in the entry method discussed in appendix

2.2.3, which emphasises the increased investment required for the operation of a

wholly owned subsidiary, while recognising the importance of such an approach so as

to keep control of functions and quality.


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5.0 Justification

Assessment of organisational capabilities is final requirement in this analysis, so as to

ensure that Qantas has the capabilities required to meet the demands of this new

strategy in terms of the resources and competences that they hold.

Strategic capabilities contribute to the achievement of strategic goals that help

cultivate competitive advantages due to their uniqueness. The opposite of this is also

true, with strategies sometime being built or designed around pre-existing capabilities

(Boyle 2013).

5.1 Resources & Competencies Exploitation of assets and how they are combined, leveraged, used or managed.

Resources

Physical Aircraft fleet, buildings, information technology systems

Financial Large number of assets both owned and leased

Human large pool of employees and manager with high amounts of experience

Competences

Physical method of airline and functional coordination along with experience and relationships

with other organisations that arises and increases in productivity and communication

Financial Large pool from which finance can be drawn, high profile increases ability raise capital.

Human Experience and organisational knowledge through career path development, used in

strategy formulation

Through these competencies, resources can be transformed into capabilities. Core

competencies, furthermore, can help resources be transformed into distinctive


40

capabilities (Teece, Pisano & Shuen 1997), which can lead to a competitive

advantage.

5.2 Cost efficiency Cost efficiency is a strategic capability if it can yield benefits for both the customer

and the organisation. Drivers of cost include economies of scale, supply costs and

product design costs, which can be visible over time.

Cost efficiency can arise from experiences. Internally, the cumulative organisational

experience results in cost savings reduces marginally over time.

In an international setting, the exercise of global sourcing through a global strategy

and Qantas’ value network chain may help develop this into a capability.

5.3 Organisational knowledge Organisational knowledge is the accumulative knowledge and experience specific to

QANTAS through the performance of tasks and activities and past experience

(Nonaka & Takeuchi 1995). Importantly, organisational knowledge is a dynamic

capability, in that it’s constantly changing and requires cultivation. Unlike most

tangible assets such as planes and IT that are very similar to competitors and thus

threshold competencies, these distinctive capabilities underpin Qantas’ competitive

advantage. Similar to the development of experiences, the history, image and

reputation for QANTAS is certainly a distinctive capability, in that it is very hard to

imitate, and simultaneously reinforces itself.

This organisational knowledge may prove to be a very important capability in Qantas’

move into India, which is a developing market where competition may not as of yet

have as much experience as Qantas. Similarly, although the image and reputation of

Qantas is a capability is not something to be relied upon in the operation of Pride

airways, the steps taken to achieve such a branding advantage could be considered

and mirrored so as to replicate its success.

5.4 Dynamic capabilities


41

The dynamic capabilities of an organisation are those which enable the organisation

to renew and recreate its strategic capabilities to meet the needs of a changing

environment. There are several capabilities of QANTAS that give it an advantage, but

whether or not they are dynamic will be analysed. These can include the brand image

of QANTAS, its ability to serve large amounts of customers through its size and

through other more formal systems such as recruitment and management styles, and

informally through positive relationships and innovative cultures.

Although exterior capabilities such as branding and customer reputation cannot be

built upon or transferred to Pride airways, the knowledge of how to do so, as

previously discussed, is in itself a capability that could potentially dynamic

5.4.1 VRINE Framework

Whether something could be considered a dynamic capability and therefore the basis

for a sustainable competitive advantage depends largely on its applicability to the

VRINE framework that assesses the aspect based on several important characteristics

(Barney 1991).

Organisational knowledge and experience

Valuable Yes - an excellent source of differentiation and provide potential competitive

advantage in a market at a cost that allow the organisation to realise reasonable

return (Bowman & Ambrosini 2007)

Rare Very much so – Not necessarily on an international scale, but potentially at a

regional level and even more likely domestically

Inimitable No – It is very hard to create knowledge without previous experience and time

Non-

substitutable

There is possibility that other airlines can find alternative to this, either through

effective consulting or collaboration with other firms who act as partners.

Exploitable Yes – the use of knowledge to rapidly expand and fulfil CSF’s is very likely

5.5 Sustainable competitive advantage


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Sustainable competitive advantages depends on the ability of Qantas to use resources,

competencies, capabilities to exploit resources to address the challenges, opportunities

and demands associated with the environment within which Pride airlines operates

relative to critical success factors and their potentially dynamic nature

5.6 Identifying strategic capabilities.

It’s very important QANTAS undertakes analysis to identify strategic capabilities, a

requirement which can be met in the following few ways.

5.6.1 Benchmarking

Benchmarking is done simply by comparing the performance of different

organisations, with focus on direct competitors (Camp 2006). Although distortions of

measurement may occur, and superficial analysis may fail to uncover the real source

of the extra value or performance created, it still provides a good indicator. Caution is

recommended, as these indicators may only represent what would be considered

threshold capabilities in a given CFS. If financial results are used, then it could be

seen that Qantas is on par with international competition which has an average return

of about 2.5% (Major airlines 2013)

5.6.2 Value chain and value network

This requires analysis of the production process and identification of any unique areas

where value is created, which customer’s value and will purchase. Breaking down and

assessing individual parts of the production process and conducting a cost/ benefit

analysis can help identify strategic capabilities (Porter 1985). There are examples of

this within QANTAS, both directly and indirectly related to production processes that

would benefit from such analysis.

Primary activities could include the ability of QANTAS to operate larger carriers and

create economies of scale. This includes any new technology, such as online booking,

payment and check in systems, and luggage tracking, where a large investment is

required but value can be provided. Furthermore, analysis of other different functions

currently utilised by Qantas, such as Q-catering, can also be used in conjunction with


43

past financial performance to determine the value that can be added through the

internalisation of functions made possible through size and thus economies of scale.

VRINE analysis could be used again to determine the sustainability of this added

value.

With regards to the value network, QANTAS’ network is also a source of value. Its

recent partnership with Emirates (QANTAS 2013) is a form of linkage and improves

customer value through better-coordinated services and, by making agreements

regarding different routes; it’s a way of limiting a potential competitor’s influence in

some areas. In terms of international networks, an important part of Prides strategy,

outsourcing certain operations such as maintenance can potentially be a source of

value creation.

5.6.3 Activity Mapping

Activity mapping is the process of linking all the tasks, procedure and processes of an

organisation, after which key linkages and activities can be identified (Porter 1996).

This is a way in which strategic capabilities can be recognised which helps

cultivation, protection and sustainment of competitive advantages. As an example,

below is the activity mapping of a budget airline in the US.

In this example it become

obvious that the important linkages include low prices, limited passenger service

facilities, a lean structure and maximum asset utilisation with minimum downtime.

Pride may have a much different structure to this, with perhaps a larger focus on

customer service and servicing major destinations as opposed to very low ticket prices

and equivalent reduction of services such as meals.


44

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Documents

SMIII part B - Qantas - Matthew Boyle