THE EXTERNAL ENVIRONMENT AFFECTING A BRITISH AIRWAYS

1.0 External Analysis

For success within the airline industry, an awareness of the external environment is essential. This section aims to highlight the position of the industry, in particular looking at competitors and assessing BAs capability to meet current and future challenges.

1.1 PESTEL Analysis (Source: Johnson et al., 2008, p56) An analysis of the macro-environment has been carried out using PESTEL (Figure 1).

Figure 1 PESTEL Analysis

PESTEL Factor Political Key Points Heavy regulation (AEA, 2009). Increased security due to past terrorist threats (DFT, 2008). Economic Global economic crisis: World growth is projected to just over 2 % in 2009 (IMF, 2008). Pound weakens especially against the Euro. Oil prices: declined by >50 % since their peak retreating to 2007 levels. Decline in fuel price = strengthening of the dollar (IMF, 2008) The UK has an aging population (see appendix 3) (National Statistics Online, 2008). Increasing unemployment (Kollewe and Sager, 2008). A recent survey revealed that 34% of online consumers plan to use pricecomparison sites more in 2009 (NMA, 2009). Online booking services and check-in is becoming increasingly used by the airline industry. Implications for BA Compliance is essential if BA wants to continue operations. Sufficient security measures should be in place to ensure consumer confidence and competitive advantage is maintained. Possible reduction in the amount of business travel as companies are cutting costs and using alternative means of communication such as teleconferencing. BA is vulnerable as a UK operating airline to a poor exchange rate. Fluctuations in oil prices and exchange rates will directly affect BAs cost base.

Social

Potential opportunities for growth as older generations have more time to spend on leisure activities such as international travel. Increased bargaining power as an employer. Increased consumer awareness and therefore bargaining power.

Technological

Environmental / Ethical

Noise pollution controls, and energy consumption controls (DFT, 2008).

BA must ensure that they remain up to date with these technological advances whilst avoiding becoming overly reliant, as this may isolate certain consumer markets (i.e the elderly) who dont feel comfortable using such technology. New legislation (e.g. Climate Change Bill) enforcing tighter environmental regulation may increase operational costs each year. Failure to adopt an integrated environmental strategy could lead to a detrimental effect on the BAs reputation and income. Such ethical issues could have a detrimental effect on reputation if left unresolved. Restriction on mergers will have an impact on BAs proposed alliance with American Airlines. Opportunity for BA and its competitors to freely transport aircraft between the EU and US.

Consumers are becoming increasingly green and more aware of the environmental impact of their actions. Cancellations of flights and loss of baggage (Channel 4, 2008). Collusion and price fixing. Open Skies Agreement (AEA, 2009)

Legal

REVIEW EXISTING BUSINESS PLANS AND STRATEGIES OF A BRITISH AIRWAYS

2.1 Porters Five Forces
(Source: Johnson et al., 2008, p60) It is important to analyse the competitive nature of the airline industry in order to assess the position of BA. The Five Forces tool will enable BA to make strategic decisions in order to increase profitability. Figure 2- Porters Five Forces Force Competitive Rivalry BA caters for both long haul and short haul flights. Within long haul there is little differentiation between BA and their competitors, in terms of price and service offering. The short haul market is more fragmented with many small players. Direct competitive rivalry is fierce, e.g. Virgin has a website opposing the proposed strategic alliance between BA and AA - No Way BA/AA (Virgin Atlantic, 2008). Power of Suppliers Two aircraft manufacturers = High bargaining power. BA restricted by sole supplier of fuel to the airport. Priority of landing slots is given to historic rights of existing users (IATA, 2008). BA employees use collective bargaining through trade unions in order to increase their bargaining power Power of Buyers Low concentration of buyers to suppliers means they have little bargaining power. Increased internet usage has amplified awareness and interaction of customers (Keynote, 2008c). Threat of New Entrants Significant barriers to entry: such as the competitive environment, high regularity requirements and high capital cost requirements. Barriers to exit are in place which deters new entrants. The failure of recent airlines such as XL and Zoom is likely to deter new entrants (Times Online, 2008). Threat of Substitutes There are few direct substitutes: o Short haul flights: the Eurostar or a ferry. o Long haul flights: no notable substitutes. Strength

HIGH

HIGH

MEDIUM

LOW

LOW

2.2 Internal Analysis It is now essential to analyse the internal environment in order to formulate appropriate strategies.

2.2.1 Value Chain Analysis (VCA) BA has tried to control the system further by forward and backward mitigation. Through controlling many component supplies in-house, and through BA Holidays Plc, BA increases their reach in the value system to the supplier and channel value chains.

Figure 3 Value Chain (Adapted from: Johnson et al., 2008, p110) FIRM INFRASTRUCTURE Structured hierarchy allows BA to make use of a multitude of specialist knowledge in order to gain competitive advantage over downsized firms. HUMAN RESOURCE MANAGEMENT Invested in the development of customer service training in 2007 attracting the best employees. Speak Up opinion survey encourages employees to provide feedback (British Airways, 2008). TECHNOLOGY DEVELOPMENT BA has added value in this category over smaller companies due to slack resources that can be employed to innovated the service (e.g. individual LCD screens). PROCUREMENT Due to the size and historical business relationships and alliances, BA is able to leverage suppliers and through economies of scale make efficiencies where competitors may fail. PRIMARY ACTIVITIES INBOUND OPERATIONS OUTBOUND MARKETING & POST SALE LOGISTICS LOGISTICS SALES SERVICE Stock Control Increased Baggage Customer Service Security. High quality Large database of training accredited Quick check-in airport slots enable by City & Guilds passengers to services and (British Airways, access the majority secure online 2008). of destinations bookings with ability to pre-book from preferred airport. Ongoing additional relationship with services. suppliers (e.g. Gate Gourmet. Marketing Loyalty club communications to card. all stakeholders. Update Brand allowing for communication large budget to be on other services spent in this field.

SUPPORT ACTIVITIES

2.2.2 SWOT Analysis

(Source: Johnson et al., 2008, p81.) It is important that strategic development is reflective of BAs strengths and weaknesses relative to competitors and the opportunities and threats presented by its external environment (Pitts & Lei, 2003): Figure 6 SWOT Analysis

Internal Strengths Brand Image

TRENGHTS
Partnerships & Alliances

Financial size and stability Terminal 5

W O

Internal Weaknesses

EAKNESSES

Poor employee relations history

Reliability and trust Innovation & change

External Opportunities SkyTrax Quality System

PPORTUNITIES

Competitors forced exit

Competitors failing on delivering reliability Emergence of new markets

External Threats Open Skies Agreement

HREATS

Environmental awareness

Global economic crisis Lower cost competition

DEVELOP OPTIONS FOR STRATEGIC PLANNING FOR A BRITISH AIRWAYS

3.0 Strategy Formulation

3.1 TOWs Matrix (Source: Johnson et al., 2008, p367.) A range of strategic options will now be formulated using the TOWs matrix to resolve the strategic issues highlighted from the analysis.

Figure 7 TOWs Matrix Opportunities Skytrax- star system of quality Competitors forced exit

External Threats Open skies agreement Environmental Awareness (Climate change bill) Global Economic Crisis Lower cost competition Strategies for Strengths to defend threats:

Competitors failing on delivering reliability Emergence of new markets Brand Image Partnerships and Alliances Strengths Financial Size & Stability Terminal 5 Internal Strategies for strengths to meet opportunities:

Segment focus. Supply chain migration.

Renovation of brand image. Diversify into other transport markets.

Introduction of complimentary services. Broader service offering.

Poor employee relations history Recent negative attention on reliability and trust Quick innovation and change

Strategies for opportunities to overcome weaknesses:

Strategies for Weaknesses not to expose threats:

Weaknesses

Improved people processes. Technological advancement.

Improved environmental stance.

Figure 8 below gives a brief explanation of each strategic option and classifies them within Ansoffs matrix. A preliminary analysis will be made, scoring each option using a number of defined performance indicators. This will lead to the elimination of options that are not considered suitable for BA, leaving the 5 most appropriate strategies to be further analysed for consideration.

Figure 8 - Preliminary Comparison of Strategies

Do BA have the financial Strategy linked to Ansoff Strategic Option Explanation resources? 1 = No 3 = Possibly 5 = Yes 1. Improvement to people processes Reduce current tension from negative employee and customer relations. 5

Effect on Brand Image. 1 = Bad 3 = No change 5 = Good

Effect on competence 1 = Bad 3 = No change 5 = Good

In accordance with current strategy? 1 = No 5 = Yes

Level of risk involved? 1 = High 3 = Medium 5 = Low

Score

Accept for further consideration?

20

1. Market Penetration

2. Improved environmental stance. 3. Renovation of brand image. 4. Segment focus

Go

above

and

beyond

current

19

environmental requirements. Renovation and modernisation of brand image in an attempt to gain market share. Focusing on business class customers as the most profitable segment of the business. 5 5 3 1 5 19 3 5 3 1 3 15

5. Technological advancement. 2. Product Development 6. Introduction of complimentary services. 3. Market Development 7. Broader service offering

Introduction of internet access on flights to improve the overall quality of service.

21

Offering of complimentary services such as car rental or hotels.

13

Increase number of destinations BA flies to, focusing areas of growth such as India and China.

19

8. Diversify into other transport markets. 4. Diversification 9. Supply chain migration.

Diversify into substitute services such as rail in an attempt to maintain competitive advantage. Vertical integration along the supply chain. i.e. Gate Gourmet or Boeing.

11

CONSTRUCT A STRATEGY PLAN FOR A BRITISH AIRWAYS

4.0 Analysis of Strategic Options Based on the analysis performed in figure 8 the five most viable strategic options will now be considered further in terms of suitability, acceptability and feasibility.

4.1 Strategic Option 1 - Improvement to People Processes Brief Outline: The analysis highlighted recent negative attention both internally and externally. The SWOT identified BAs public criticisms for poor bag handling and delay management, and disapproval following a number of negatively handled employment related cases. A people processes strategy may rebuild brand image and stakeholder confidence. SUITABILITY Poor employee relations history and recent negative attention on BAs reliability and trust (SWOT). Given the current economic environment, unemployment is increasing (PESTEL). Therefore, the threat of industrial action and resignations are less likely at this time. BAs current strategies are to motivate, engage, support and develop employees, alongside improving baggage handling and delay management at their resident airports (British Airways, 2008). Increase in internet usage, with more customers and independent services reviewing and sharing feedback (Porters five forces). Better customer relations may improve such reviewing mechanisms. SUPPORTS STRATEGY?

ACCEPTABILITY

SUPPORTS STRATEGY?

Employees and customers are likely to invest high interest into the development of their relations with the organisation due to the negative past experiences. Skytrax highlights that customer relations is an important measure for customers when selecting airlines for travel, increasing the potential of high returns (Skytrax, 2008).

FEASIBILITY

SUPPORTS STRATEGY?

The industry and organisation is highly unionised, and are likely to gain support from this external body when strategically developing employee relations.

4.2 Strategic Option 2 - Improved Environmental Stance.

Brief outline: As identified within the PESTEL analysis, environmental issues are becoming increasing important. A reactive strategy therefore could be to build an improved environmental stance and go beyond the requirements of regulations such as the climate change bill. SUITABILITY SUPPORTS STRATEGY? This would ensure that BA remains a strong global competitor by ensuring they are meeting changes in socio-economic behaviour. Consumers are becoming more environmentally friendly and this strategy would at least ensure that BAs market share is not compromised if competitors move in a similar direction (PESTEL).

ACCEPTABILITY

SUPPORTS STRATEGY?

Changes in customer preferences indicate a heightened concern for the environment (PESTEL); therefore this strategy is low risk, especially when coupled with a low degree of uncertainty. Furthermore, this strategy will ensure that BA is identifying and meeting customer demands. As the requirements of environmental regulations are frequently increasing (PESTEL), it would be beneficial for BA to be the first mover in the industry and make changes before any of its competitors.

FEASIBILITY

SUPPORTS STRATEGY?

Resources may be better employed elsewhere, as investing in environmental policies may not increase returns.

4.3 Strategic Option 3 - Improved Technological Stance. Brief outline: The technological capabilities of an airline is increasingly affecting consumer choice of airlines, from both leisure and business fliers. Greater improvement of the in-flight services will enhance their overall service, increasing long-term revenues.

SUITABILITY

SUPPORTS STRATEGY?

The in-flight entertainment facilities need to be greatly improved and become more reliable. This will lead to a long-term growth in the number of passengers. Many of BAs main competitors are beginning to introduce basic internet capabilities on selected flights. Therefore it is in its interest to keep up with the competition and exceed it by rolling out internet access on all flights. BA is currently testing the service on one flight from London City Airport to JFK, New York (Shephard, 2009).

ACCEPTABILITY

SUPPORTS STRATEGY?

Extensive testing has found the internet connection to be reliable, with loss of connection only occurring for a couple of seconds during adverse weather conditions. Delivery time of the project Implementation takes only 1-3 days per plane (Row 44, 2008).

FEASIBILITY

SUPPORTS STRATEGY?

Ownership of the operations is much less costly and more reliable than the abandoned Connexion service offered by Boeing (DailyWireless, 2007). BA has the slack resources in the technology department needed to implement this strategy (VCA). BA must successfully deploy this technology first time; otherwise it will receive serious criticism and could ruin its long-term image.

4.4 Strategic Option 4 - Segment Focus Brief outline: Focus and tailor tactics to the business segment to combat Virgin Atlantics market share growth. SUITABILITY SUPPORTS STRATEGY? The company overview shows this strategy aligns with the existing BA strategy to improve the customer experience. The recent 8.6% drop in BAs business class passengers suggests a need to address the current strategy (Milmo, 2008). Although the business segment is not growing as significantly in long haul as in short haul, (Keynote, 2008c), the profitability and sustainability of the customers demand provides incentive for market share growth.

ACCEPTABILITY

SUPPORTS STRATEGY?

In relation to other strategies the benefit to cost ratio may not be as great. The benefits should also be sustainable through increase brand image and preference.

FEASIBILITY

SUPPORTS STRATEGY?

The time frame to implement the strategy is achievable through resource allocation, as there is no immediate urgency or threat. BA may have already missed the first mover initiative with specialists such as Virgin being so successful, the imitation BA would offer may gain little credit (SWOT).

4.5 Strategic Option 5 - Broader Service Offering Brief outline: Extend flights and services to new destinations past that of BAs current strategy.

SUITABILITY

SUPPORTS STRATEGY?

There is an increasing demand for new destinations to be reached directly by domestic and international travellers. As the pound continues to fail against the Euro, the economic advantage to travelling to other destinations is found (PESTEL). BA has just restarted services to some destinations in the middle east after a decade of a turbulent political environment (Tradearabia.com). The risk to some destinations is still present and BA may not wish to take on the security risks.

ACCEPTABILITY

SUPPORTS STRATEGY?

Extending markets and their opportunities allows BA to capitalise on low competition as the first mover advantage is gained. The benefits far outweigh the costs, although the difference in benefit to the current strategy may be doubtful in relation to other strategic options.

FEASIBILITY BAs brand strength accommodates globalisation and a higher probability of acceptability by new countries. Against local competition BAs brand strength may not be enough to achieve the demand needed.

SUPPORTS STRATEGY?

Based on the analysis of the strategic options it has been decided that before growth strategies are pursued BA should focus on defending its current market position and achieving fundamental service quality. Based on this the people processes and technological advancement strategies are deemed most appropriate for implementation.