SUMMARY OF COMPETITIVE RIVALRY & STRATEGIC ALLIANCE IN AIRLINES

ASSIGNMENT FOR BUSINESS STRATEGY CLASS

NAME : Kuspratama

NIM : 29113021

CLASS : R 49B

MBA-ITB

YOUNG PROFESSIONAL PROGRAM

2014

Chapter 5 – Competitive Rivalry & Competitive Dynamics

Rivalry in Business Competition

In the traditional economic model, competition among rival firms drives profits to zero. But competition is not perfect and firms are not unsophisticated passive price takers. Rather, firms strive for a competitive advantage over their rivals. The intensity of rivalry among firms varies across industries, and strategic analysts are interested in these differences.

If rivalry among firms in an industry is low, the industry is considered to be disciplined. This discipline may result from the industry's history of competition, the role of a leading firm, or informal compliance with a generally understood code of conduct. Explicit collusion generally is illegal and not an option; in low-rivalry industries competitive moves must be constrained informally. However, a maverick firm seeking a competitive advantage can displace the otherwise disciplined market.

When a rival acts in a way that elicits a counter-response by other firms, rivalry intensifies. The intensity of rivalry commonly is referred to as being cutthroat, intense, moderate, or weak, based on the firms' aggressiveness in attempting to gain an advantage.

In pursuing an advantage over its rivals, a firm can choose from several competitive moves:

Changing prices - raising or lowering prices to gain a temporary advantage. Improving product differentiation - improving features, implementing innovations in the

manufacturing process and in the product itself. Creatively using channels of distribution - using vertical integration or using a distribution

channel that is novel to the industry. For example, with high-end jewelry stores reluctant to carry its watches, Timex moved into drugstores and other non-traditional outlets and cornered the low to mid-price watch market.

Exploiting relationships with

The intensity of rivalry is influenced by the following industry characteristics:

1. A larger number of firms increases rivalry because more firms must compete for the same customers and resources. The rivalry intensifies if the firms have similar market share, leading to a struggle for market leadership.

2. Slow market growth causes firms to fight for market share. In a growing market, firms are able to improve revenues simply because of the expanding market.

3. High fixed costs result in an economy of scale effect that increases rivalry. When total costs are mostly fixed costs, the firm must produce near capacity to attain the lowest unit costs. Since the firm must sell this large quantity of product, high levels of production lead to a fight for market share and results in increased rivalry.

4. High storage costs or highly perishable products cause a producer to sell goods as soon as possible. If other producers are attempting to unload at the same time, competition for customers intensifies.

5. Low switching costs increases rivalry. When a customer can freely switch from one product to another there is a greater struggle to capture customers.

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6. Low levels of product differentiation is associated with higher levels of rivalry. Brand identification, on the other hand, tends to constrain rivalry.

7. Strategic stakes are high when a firm is losing market position or has potential for great gains. This intensifies rivalry.

Defining Your Competitive Position

In this final portion of the competitor analysis your focus turns away from competitors to your business. Specifically, what factors will set your product or service apart from your competitors? There are at least two approaches available for you to explain your sources of competitive advantage.

Opportunities and threats: The competitor analysis (SWOT-Strength, Weakness, Opportunity, Threat) grid reveals the strengths and weaknesses of your competitors. The other half of the analysis is to look for opportunities and threats that your company can use. For example, a weakness-opportunity strategy would create an opportunity for your business based on a weakness found in competitors. Or a strength-threat strategy focuses on risk avoidance by initiating a strategy that minimizes a threat caused by a competitor's strength.

Design your dynamics accordingly, specifying what will give your business a competitive edge in contrast to other competitors. For example, your business will provide a full range of products, competitors A and C don't. Or your business will provide after-purchase customer service, something only competitor C does. Or your merchandise will be of a higher quality and include a money-back guarantee, something no other competitor does. Or competitors B and C sell the best widgets, but your site will sell the best gadgets.

Competitive strategies: Look at your product, pricing, promotion, distribution, and service and ask the following questions (adapted from the competitor analysis grid):

Cost leadership: Can you be a low-cost producer and sell equivalent or better goods in the marketplace for less?

Differentiation: How can you distinguish your product in the marketplace? Innovation: Is there opportunity to create a new way of doing business, perhaps one

that changes the nature of the industry? Growth: Are there opportunities to expand production, sell into new markets,

introduce new products? Alliance: Can current or prospective production, promotion, and distribution be

improved through partnerships with suppliers, distributors, and others? Time: Can your business reduce product cycle time? Offer express customer service?

Use time in other ways that your competitors are not doing?

There may also be opportunities for you to:

Lock in customers and suppliers Create switching costs for customers and/or suppliers Improve business processes Raise entry barriers for rivals and substitute products Create a strategic information system or strategic information base

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The answers to these questions might reveal sources of competitive advantage such as patents, branding (e.g., a marketable domain name such as plumber.com), innovative product sales techniques, better and/or cheaper sources of supply than competitors, more entrepreneurial management, and superior customer relationship management strategies.

Whether you use the opportunities-and-threats approach, competitive strategies approach, or a combination, you will find that a company's competitive positioning strategy is affected by a variety of factors that are related to the motivations and requirements of the consumers in the target market, as well as the offerings and positioning strategies of competitors.Whatever changes (dynamics) you plan will point out exactly how your product or service will be perceived by customers as different, and better, than what is offered by your competitors.

RM 8 – Strategic Alliance in Airlines Operation

As companies gain experience in building alliances, they often find their portfolios ballooning with partnerships. While these partnerships may contribute value to the firm, not all alliances are in fact strategic to an organization. This is a critical point, since, as this article will explain, those alliances that are truly strategic must be identified clearly and managed differently than more conventional business relationships.Due to the levels of organizational commitment and investment required, not all partner relationships can be given the same degree of attention as truly strategic alliances. The impact of mismanaging a strategic alliance or permitting it to fall apart can materially impact the firm’s ability to achieve its core business objectives.

What is it that makes an alliance truly strategic to a particular company? Is it possible for an alliance to be strategic to only one of the parties in a relationship? Many alliances default to some form of revenue generation—which is certainly important— but revenue alone may not be truly strategic to the objectives of the business. There are five general criteria that differentiate strategic alliances from conventional alliances. An alliance meeting any one of these criteria is strategic and should be managed accordingly.

Critical to the success of a core business goal or objective. Critical to the development or maintenance of a core competency or other source of

competitive advantage. Blocks a competitive threat. Creates or maintains strategic choices for the firm. Mitigates a significant risk to the business.

The essential issue when developing a strategic alliance is to understand which of these criteria the other party views as strategic. If either partner misunderstands the other’s expectation of the alliance, it is likely to fall apart. For example, if one partner believes the other is looking for revenue generation to achieve a core business goal, when in reality the objective is to keep a strategic option open, the alliance is not likely to survive.

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The Impact Of Airline Alliances

At this moment, there are three main airline alliances around the globe. First of all, Star Alliance, which was created in 1997. Second, OneWorld, established in 1999 and presently having 12 members. Last, the youngest airline alliance is SkyTeam, formed in 2000 and consists now of 18 member airlinesIn this paper, the impacts of airline alliances on their members will be discussed And the influences of airline alliances on the airports they fly at will be explained. In this review, both positive and negative influences will be discussed.

1. Impacts on member airlines

Positive impacts on member airlines

A first positive impact can be found in saving the airline’s costs on various areas. For instance, when buying aircraft materials for maintenance purposes, member airlines can reduce the total costs by purchasing these resources together and may receive bulk discounts. The same counts for the bulk purchase of aircraft. A second positive impact on member airlines can be retrieved in the increased passenger traffic. The cause of this increase is generally caused by the extension of the airline’s network by using code-sharing Code sharing is beneficial for both the ‘selling’ airline and the ‘operating’ airline. On the one hand, it is advantageous for the selling airline as it is selling a ticket of the operating airline under its own designator code. This means that the selling airline gained access to new markets without having to operate their own aircraft there. On the other hand, the operating airline is likely to carry more passengers on board as the tickets are sold through more distribution channels than rather its own.

A third positive impact can be found in the area of labour costs. Nowadays, labour costs represent quite a considerable part of an airline’s operating cost. Labour costs differ more between airlines in the same markets, unlike other costs as ground handling, fuel and airport fees. Iatrou (2006) gives two reasons how an airline alliance could help in reducing labour costs. First, the number of sales and ground personnel could be reduced by sharing offices at bases of another member airline, instead of maintaining its own offices across the globe. Second, it is argued that alliances facilitate member airlines to resort to the low-wage structure of its partners, for example cabin and cockpit crew, without saving on employee quality.

Negative impacts on member airlines

Although alliances have several positive effects on member airlines, being in an alliance could also have some negative impact on member airlines. First, it is argued that participating in an alliance could affect an airline’s brand image. This problem may be triggered by the variety of images within the alliance. The authors suggest that it could be possible that an image for an alliance is created that is unlike the image of any of the affiliated airlines. However, a concession between the images of the most dominant member

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airlines is considered to be more likely. Especially for smaller airlines it could be considered to be hard to adapt to the created image of the alliance.

A second negative effect could be conflicting agreements. Iatrou (2006) explains that it is likely that all alliances members use the same supplier. Before an airline accesses to an alliance, it usually has long-standing relationship with different suppliers, such as catering, Central Reservation System (CRS) and so on. The airline may find it difficult to rescind these contracts because of possible penalties as a consequence. Moreover, when an airline agrees on a new supplier, it will very likely have to invest time and money in getting familiarised with the new suppliers and their systems. This brings us to a third possible negative effect.

Increased costs for an airline could be considered as another probable negative impact on member airlines. Next to the regular subscription fee that a member airline has to pay, Iatrou (2006) mentions the – so-called – “sunk-costs” for the airline. These tangible expenses cover all adjustments that have to be made in order to meet the alliance’s requirements, like the aircraft interior. These investments are to be made to ensure effective alliance operations and to have consistent commitment of the member airlines to the alliance. Especially for relatively small airlines, these costs can be seen as a considerable investment, which might make them more dependent on the alliance.

2. Impacts on airports

Positive impacts on airports

The presence of airline alliances has various positive impacts on airports. As all members in an alliance have an extended destination network, because of the connectivity possibilities of their alliance partners, it can be argued that the number of transfer passengers at airports increases. As a consequence, this increasing number of transfer passengers has also a positive effect on the purchase of duty-free products in the airport shops. In order to increase the sales at airport shops, an airport can decide on opening speciality stores which may interest international transfer passengers.

3.2. Negative impacts on airports

In contrast with the various positive effects of airline alliances on airports, there are also some downsides.As airline alliances bring an increased number of additional traffic, congestion at an airport can be considered as a negative effect, particularly at peak times. Especially when there is an ineffective use of the airport infrastructure, it can be hard to harmonise the flights in a short timeframe. At many of this type of airport it has been considered unavoidable to split the use of the runway into “time-defined segments” – commonly known as “slots”. According to IATA (2011), slots can be defined as “a permission given by a coordinator for a planned operation to use the full range of airport infrastructure necessary to arrive or depart at an […] airport on a specific date and time”. Besides, most flights at hubs are scheduled in – so called – ‘waves’. In each ‘wave’, a large

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number of arriving flights in a short timeframe is followed by more or less the same number of departures, after allowing some time for reallocation of passengers and luggage.

As airports do not have an unrestricted peak capacity, especially during such a wave, airlines are ought to adapt their schedules. Dennis (2001) discusses two main options for rescheduling. First, flights can be added to the borders of the present waves. Second, new waves can be developed to accommodate these additional flights. With regard to the number of connections, the first option is more likely to be chosen. However, while extending the current wave, the connection time will also increase.

A second negative impact on airports is the investment that airports have to make for alliances in order to accommodate seamless transfer connectivity. In order to reduce the Minimum Connecting Time (MCT) for passengers, airports have done some adjustments to their infrastructure. An example is Brussels Airport in Belgium, which upgraded their customs and immigration facilities to create a better flow of passengers transferring from a Schengen origin to a Non-Schengen destination. Some airports are not designed to accommodate traffic from airline alliances. For example, when an airport has multiple terminals that are not located near each other. This might take a passenger a long time to transfer when alliance partners are spread over multiple terminals, affecting the MCT as well (Dennis, 2001).

Refferences

Dennis, Gustavo, Lynette (2001), An Empirical Investigation of the Competitive Effects of Domestic Airline Alliances. NBER Working Paper., Journal of Law & Economics : University of Chicago.

Hitt, Ireland, Hoskisson (2011), Concept Strategic Management (Competitiveness & Globalization). 9th Edtion., Canada : South-Western CENGAGE Learning.

Iatrou, Alamdari (2005), The Empirical Analysis of the Impact of Alliances on Airline Operations. Journal of Air Transport Management 11., Cranfield University : Bradford.

Iatrou (2006) Airline Choices for the future : From Alliances to Mergers. Global Symposium on Air Transport Liberalization., ICAO Dubai : UAE.

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