MGMT 321 Class 6 Strategy

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MGMT 321Class 6Strategy

• Agenda
• Corporate and competitive strategy

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First Exam

• Multiple Choice Mean 24.2 (81)
• High 30.0 (100)
• Low 14.0 (47)
• The essay questions are still being graded.
• We will try to post grades on Friday.

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Office Hours to Go Over Your Exam

• Corey Bowers
• Monday, April 24th from 100-300p in 174 Lillis
• Tuesday, April 25th from 300-400p in 458 Lillis

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The Concept of Strategy

• The primary task of top management is thinking
  through the mission of the business that is,
  asking the question What is our business and
  what should it be?
• Peter Drucker
• Strategic planning involves identifying the
  current business of a firm and the business it
  wants for the future, and the course of action or
  strategy it will use to pursue its objectives

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Strategic Management Process
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Strategic Management Process

• Strategy begins with a clear statement of
  direction
• Vision statements

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Collins-Porras Vision Framework
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Illustration of a Mission Statement Giro Sports
Design
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Illustration of a Mission Statement Giro Sports
Design

• Core values and beliefs
• Great products. Innovative, high quality and
  unquestioned best in its category
• Great customer service. Service standards are as
  stiff as our product standards. Treat customers
  as we would our friends.
• Golden Rule. Treat others as we would like to be
  treated.

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Illustration of a Mission Statement Giro Sports
Design

• Core values (cont.)
• Teamwork. No individual is indispensable. Think
  we, not I
• Best effort. Do your best in every task
  undertaken. Strive for an A, not a B
• Details. The little things matter. God is in the
  details.
• Integrity. We are honest. We honor our
  commitments. We are consistent and fair.

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Illustration of a Mission Statement Giro Sports
Design

• Purpose
• Giro exists to make peoples lives better
  through innovative, high quality products

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Illustration of a Mission Statement Giro Sports
Design

• Mission (circa 1990)
• Giros mission is to be a great company. We aim
  to be the most respected and admired company in
  worldwide cycling by the year 2000

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Strategic Planning

• Industry analysis
• Company analysis
• SWOT, core competence and sustainable competitive
  advantage
• Corporate-level strategies
• Competitive strategies

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Illustrating Competitive Industries

• Warren Buffett, Chairman and Chief Executive
  Officer of Berkshire Hathaway, was asked by a
  shareholder at an annual meeting
• What is the fastest way to have a stock
  portfolio worth 1 million?
• How do you think he answered?

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Competitive Industries

• Buffetts answer
• Invest 10 million in an airline stock

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Warren Buffett on the Airline Industry

• If you go back to the time of the Kitty Hawk,
  net, the airline transport business in the U.S.
  has made no money. Despite putting in billions
  and billions and billions of dollars, the net
  return to owners from being in the airline
  industry, if you owned it all, and if you put up
  all this money, is less than zero.
• The first flight of the Wright Brothers was one
  small step for for mankind, and one huge step
  backwards for capitalism.

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Competitive Industries

• Airline industry is one of the most competitive
  industries in the U.S.
• We can use this industry to help illustrate the
  strategy concepts from the text
• To understand the airline industry today you need
  to go back in its history to see how it got to
  where it is

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Brief History of the Airline Industry

• Airline industry was regulated until 1978
• Civil Aeronautics Board set fares and awarded
  routes
• Industry dominated by a small number of
  established airlines
• Significant barriers to entry
• CAB protected market share by controlling routes
  and ensuring profitability by setting fares

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Flying in a Regulated Industry
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Brief History of the Airline Industry

• Keys to success under regulation
• Small airlines High traffic, point-to-point
  routes like New York to Miami
• Large airlines Large number of long distance
  routes (e.g., New York to San Francisco) with
  high schedule frequency, dominant market share,
  and a distance-based fare structure

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Effects of Deregulation

• Deregulation changed the competitive landscape in
  fundamental ways

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Brief History of the Airline Industry

• Keys to success under deregulation
• Hub and spoke systems with schedule frequency
  that yielded cost and market economies, as well
  as barriers to entry
• Perceived service advantage, including frequent
  flyer loyalty programs and alliances with other
  airlines
• Powerful reservation systems that allowed airline
  to dominate the distribution channel

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Route Systems Before and AfterDeregulation
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Brief History of the Airline Industry

• Keys to success under deregulation
• Hub and spoke systems with schedule frequency
  that yielded cost and market economies, as well
  as barriers to entry
• Perceived service advantage
• Powerful reservation systems that allowed airline
  to dominate the distribution channel

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Brief History of the Airline Industry

• Not all airlines adjusted their strategies to
  compete successfully under deregulation
• Airlines that failed or who came close to it
• Braniff
• Western
• Eastern
• Pan American
• TWA
• Airlines that survived
• American
• United (just emerged from bankruptcy)
• Delta (currently in bankruptcy)
• Northwest (currently in bankruptcy)
• Continental (turnaround after two bankruptcies)

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Effects of Deregulation of the Airline
Industry(New York Times, January 23, 2005)
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Brief History of the Airline Industry

• New entrants like Southwest and People Express
  competed with major airlines by
• Managing costs and lowering fares
• Initially avoiding direct competition in hub
  cities by flying point-to-point routes
• Focusing on new segments of the traveling public
  (sandals and backpacks)
• Southwest succeeded, People Express did not

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Brief History of the Airline Industry

• Established airlines competed with new entrants
  in a number of ways
• Established hubs (fortress hubs) in strategic
  locations
• Frequent flyer plans that created deep loyalty
  among frequent travelers
• Centralized reservation systems that favored
  their own flights over others and allowed low
  fares on selected routes and days
• International alliances that increased loyalty of
  business travelers

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Strategic Alliances in the Airline Industry
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Brief History of the Airline Industry

• Airline industry is facing a fundamental
  restructuring today as the result of three forces
• Shrinking high-end demand for air travel
  beginning in late 2000
• Increased price sensitivity of business travelers
• Technological alternatives to air travel
• Entry of a number of low-cost carriers who are
  now large enough to attack in established hubs
• Increased transparency of alternative airline
  offerings and fares made possible by the internet
  and other technologies

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Brief History of the Airline Industry

• Established airlines made a fundamental mistake
  in responding to deregulation that remarkably
  worked for 25 years but that is now catching up
  with them
• Focused on managing revenues by expanding service
  instead of lowering costs

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Brief History of the Airline Industry
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Brief History of the Airline Industry
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Porters Five Forces Model of Industry Competition

• The five-forces model helps managers understand
• the competitive intensity of an industry
• identify competitive advantages given industry
  competition

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Porters Five Forces Model of Industry Competition
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Applying the Five Forces Model to the Airline
Industry

• Industry competitors
• Many other airlines
• Potential entrants
• Relatively lower barriers to entry than under
  regulation
• Power of suppliers
• Low to high
• Power of buyers
• High
• Substitutes
• Other forms of transportation (trains, cars)

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What would be an ideal industry according tothe
Five Forces Model?

• Industry competitors
• Few or none
• Potential entrants
• High barriers to entry
• Power of suppliers
• Low
• Power of buyers
• Low
• Substitutes
• Few or none

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SWOT Analysis
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Hypothetical SWOT Analysis for an Airline
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TOWS Matrix
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Core Competence

• The collective learning in the organization,
  especially knowing how to coordinate diverse
  production skills and integrate multiple streams
  of technologies
• what an organization does really well or better
  than anyone else
• Canon fine optics, precision mechanics,
  microelectronics
• WalMart managing the value chain
• Honda manufacturing internal combustion engines

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Sustained Competitive Advantage

• Superiority
• Better than competitors (e.g., Federal Express in
  tracking packages)
• Inimitability
• Advantage hard to copy (e.g., superior service at
  Southwest due to loyal employees)
• Durability
• Long lasting advantage (e.g., patent protection)
• Nonsubstitutability
• Hard to satisfy need by other means (e.g.,
  encyclopedia Britannica and the Internet)
• Appropriability
• Ability to capture the profits that can be made
  in the industry (e.g., Dells operating margins
  are above 8 while HP, Apple, and IBM margins are
  slim or non-existent)

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Corporate-level Strategies

• Focus on two critical questions
• What business or businesses are we in?
• What business or businesses should we be in?

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Corporate-level Strategies

• Concentration
• Single business
• Vertical integration
• Multiple businesses that are vertically related
• Diversification
• Related
• Unrelated

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Vertical Integration Strategy

• Airlines can operate multiple, vertically
  integrated businesses
• Airline reservation service
• Packaged travel services (e.g., tours)
• In-flight meal preparation
• Airline
• Rental cars
• Hotels

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Corporate-level Strategies

• Concentration
• Single business
• Vertical integration
• Multiple businesses that are vertically related
• Diversification
• Related
• Unrelated

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Diversification Strategy

• Related diversification
• e.g., airline manufactures jet engines or
  prepares meals provided on flights to other
  airlines
• Unrelated diversification
• e.g., airline also in the automobile insurance
  business

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Corporate-level Strategies

• Most U.S. airlines operate with a
  concentration/single business strategy
• Achieving growth while concentrating in a single
  line of business
• Market penetration
• Geographic expansion
• Product development
• Horizontal integration

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Generic Competitive Strategies

• How will we compete in the businesses we are in?
• If a company is in multiple businesses, they may
  have multiple competitive strategies
• Even within a single business, more than one
  competitive strategy is often essential

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Generic Competitive Strategies

• Cost leadership
• Low-cost leader in an industry
• Differentiation
• Unique along some dimension valued by consumers
• Focus
• Compete in a narrow market segment

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Competing as a Low Cost Carrier

• Key to success is aligning everything that you do
  with lower costs
• Southwest is the most successful domestic low
  cost carrier

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Low Cost Strategy Southwest
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How Major Airlines are Cutting Cost to Compete

• Layoffs
• Wage and benefit concessions
• Eliminate or reduce pension contributions
• Eliminate unprofitable routes
• Outsourcing maintenance
• Reduce service or make passengers pay for it
  (e.g., in-flight meals, entertainment, exit row
  seats)

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How Major Airlines are Cutting Cost to Compete

• The Catch
• You cant control everything
• Fuel costs have risen to a level where you lose
  money on every passenger you fly

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Rising Jet Fuel Prices
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How Major Airlines are Cutting Cost to Compete

• Fuel Hedging
• Airline Through Price per
• ( hedged) period Barrel
• American
• 9 Sept. 30, 2004 32
• 4 Dec. 31, 2004 30
• Continental
• 45 Sept. 30, 2004 36.4
• 45 Dec. 31, 2004 36.5
• Southwest
• 80 Dec. 31, 2004 24
• 80 Thru 2005 25
• Source Wall Street Journal, August 19, 2004

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Low Cost Strategy

• What is the lowest cost airline in the world?

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Low Cost Strategy
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Low Cost Strategy Ryanair

• London (Stansted) to
• (April 20, 2006)
• From From
• Salzburg 0.79 Barcelona 0.79
• Genoa free Berlin free
• Frankfurt 0.79 Seville 2.79
• Rome 0.79 Palermo 2.79
• Fares do not include taxes, fees and charges not
  to exceed 15.20
• 1 1.7462
• 1 0.5727

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Low Cost Strategy Ryanair

• How Ryanair Manages Costs
• Fleet of new, fuel efficient planes
• Fly to remote airports
• No frills
• Eliminated window shades and seat-back pockets
• Installed seats that dont recline
• No refunds for tickets (Ryanair pockets the taxes
  and airport fees if you miss a flight)
• Employees pay for their own training and uniforms
• Flight attendants paid commissions for in-flight
  food sales, allowing the airline to reduce their
  salaries
• Rigid checked baggage policy and high fees for
  excessive baggage
• Internet ticket sales

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Low Cost Strategy Ryanair vs. Southwest

• Ryanair Southwest
• Cost per
• passenger 41.90 83.04
• Net profit
• margin 19 7.4
• Source Wall Street Journal, July 1, 2004

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Differentiation Competitive Strategy

• Differentiate yourself from competitors along
  some dimension of value to customers

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Differentiation Competitive Strategy

• Customer Value Proposition
• Fly people
• where they want to go
• when they want to go there
• on-time
• in comfort with amenities
• pleasant experience

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Importance of market segments

• High Fractional
• Jets
• United
• American
• Cost Delta
• Continental
• Northwest
• Jet Blue
• Southwest
• Low Ryan Air
• Low High
• Service

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Some airlines operate in each market segment

• High
• Delta Air Elite
• Cost Delta
• Low Song
• Low Service High

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Differentiation Strategy
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Differentiation

• Jet Blue entered market as a low-cost competitor
  to Southwest but differentiated itself based on
  service
• Hub in major metropolitan area (New York City)
• Leather seats
• In-seat entertainment system

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jetBlue Route Map
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Generic Competitive Strategies

• Cost leadership
• Low-cost leader in an industry
• Differentiation
• Unique along some dimension valued by consumers
• Focus
• Compete in a narrow market segment

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Focus Strategy
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Focus Strategy
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Airline Industry

• Interesting Question
• If so many airlines like Delta, United, Northwest
  and US Air are doing so poorly in an industry
  with excess capacity, why havent more airlines
  gone out of business?
• In an efficient market, wouldnt capacity
  (supply) adjust to meet demand?

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Airline Industry

• Answer
• They are being financially propped up by airline
  leasing companies

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Risks of Competitive Strategies
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Importance of multiple competitive strategies

• To avoid being attacked by competitors it is
  useful to have more than one competitive
  advantage
• e.g., low cost and differentiation based on
  service

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The Airlines Industry Sometimes Nothing Goes
Right
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Next Class

• Management clinic
• Assigned case Stick to the core or go for more