Project Report Strategic Management- II

Prateek Gupta- 10DM-103 Manasvi Singh- 10DM-191 Neerav Harsh- 10DM-192 Mohit Bhambri- 10FN-061 Rahul Kumar- 10IB-049

Executive Summary This report was produced for the purpose of providing British Airways Plc (British Airways) with a strategic plan to implement over the next three years. British Airways is the UK market leader in airline operations, however has faced increasing competition over the last decade resulting in erosion in their market share. The report begins by analysing the current internal and external environment of BA. Through strategic evaluation we have recommended that BA focus on their fundamental service delivery to restore their competitive advantage within the industry. This will require implementing a combination of two strategies; a people processes strategy and a strategy focused on technological advancement. The people processes strategy was derived from a number of industry sources outlining BAs decline in customer satisfaction. The technological advancement strategy coincides with the renewal of BAs aircraft fleet and will further improve the overall customer experience.

Table of Contents

Table of Contents...........................................................................................................................................3 1.1 Report Objectives.....................................................................................................................................4 1.2 Company Overview..................................................................................................................................4 1.3 Current Strategies.....................................................................................................................................4 Figure 1 - Business Map (T-O 8.32bn)........................................................................................................5 ........................................................................................................................................................................6 2.0 External Analysis.....................................................................................................................................7 2.1 PESTEL Analysis ................................................................................................................................7 2.2 Porters Five Forces ............................................................................................................................9 2.3 GE Matrix ..........................................................................................................................................10 3.0 Customer Analysis.................................................................................................................................11 4.0 Competitor Analysis ..............................................................................................................................12 4.1 Strategic Groups.................................................................................................................................12 4.2 Airline Quality Review (AQR)..........................................................................................................13 5.0 Internal Analysis....................................................................................................................................14 5.1 Value Chain Analysis (VCA).............................................................................................................14 5.2 Resource Based View (RBV).............................................................................................................16 5.3 Financial Analysis (Source: British Airways, 2008)..........................................................................17 6.0 Summary ...............................................................................................................................................18 6.1 SWOT Analysis .................................................................................................................................19 6.2 Key Strategic Issues ..........................................................................................................................19 ......................................................................................................................................................................21 7.0 Strategy Formulation .............................................................................................................................22 7.1 TOWS Matrix ....................................................................................................................................22 Figure 11 - Preliminary Comparison of Strategies...................................................................................23 8.0 Analysis of Strategic Options.................................................................................................................24 8.1 Strategic Option 1 - Improvement to People Processes.....................................................................24 8.2 Strategic Option 2 - Improved Environmental Stance. .....................................................................25 8.3 Strategic Option 3 - Improved Technological Stance. ......................................................................26 8.4 Strategic Option 4 - Segment Focus...................................................................................................27 8.5 Strategic Option 5 - Broader Service Offering...................................................................................28 ......................................................................................................................................................................30 9.0 Implementation.......................................................................................................................................31 9.1 Company Structure.............................................................................................................................32 9.2 Service Quality Gaps Model..............................................................................................................33 9.3 Managing the Change.........................................................................................................................34 9.4 Stakeholder Map................................................................................................................................36 9.5 Control Systems.................................................................................................................................37 9.6 Balance Scorecard..............................................................................................................................38 10.0 Critique.................................................................................................................................................39

1.1 Report Objectives

The objectives and structure of this report will consist of four main sections which will enable a strategic direction to be recommended to BA: 1 2 3 4 To To To To research in to the current strategic position of British Airways. critically analyse British Airways internal and external environment. design a selection of strategic options utilising the internal and external analysis. evaluate the most appropriate option for British Airways and discuss implementation.

1.2 Company Overview British Airways Plc (BA) is the UKs largest international scheduled airline. Alongside scheduled services, BA is engaged in the operation of international and domestic carriage of freight and mail, and the ancillary services (Datamonitor, 2010). In association with codeshare and franchise partners, BA fly to more than 300 destinations, and carried more than 33 million passengers, earning over 8.7 billion in revenue in 2007/08 (British Airways, 2010). Employee headcount in March 2010 stood at 42,377 people (Datamonitor, 2010). Since privatisation in 1987, BA has continued to grow as competition in the market has risen worldwide. In recent times, BA has successfully been labelled the worlds first airline to take part in a scheme to reduce greenhouse gas emissions (2002) and to allow passengers to print online boarding passes (2004) (British Airways, 2010). In 2005, the company saw Willie Walsh become Chief Executive of BA (Flight Global, 2010), who to date has driven the company through the completion of Terminal 5 at Heathrow, amongst other new initiatives. Despite reported and imminent industry hits due to the global economic downturn, BAs future looks promising. As BA announces its aim of becoming the worlds most responsible airline in the latest annual report (British Airways, 2010), great importance lies in developing guiding principles and careful strategic direction to allow the achievement of this goal. 1.3 Current Strategies The report will be designed in consideration of BAs current strategies (British Airways, 2010): 1 2 3 4 Upgrade customer experience via the introduction of text and mobile services for business class customers. Modernise aircraft fleet and offer new services. Manage cost base. Increase corporate responsibility through environmental performance and partnerships.

Although BA does operate in a number of areas such as cargo, we are choosing to focus our report on the scheduled passenger market due to the size and opportunities that BA has in this market (Figure 1: BA Operations).

Figure 1 - Business Map (T-O 8.32bn)

Industry Regulators And Influencers

Member of: AEA

UK Government BAA, CAA, DFT

Research and Interest Groups

Component Suppliers

Aircraft Suppliers: Boeing and Airbus SAS

Airports: Heathrow and Gatwick...

Other Suppliers: Food Suppliers

Support Provider Subsidaries

BA Avionic Engineering, BA Interior Engineering, BA Maintenance Cardiff BA Leasing, BA Capital, BA Holdings, BA Cash Management, Speedbird Cash Management, Speedbird Insurance Company, Air Miles Travel Promotions

Cargo = 7.0%
Mail +freight diplomatic bags Scheduled BA Cityflyer, Openskies

Passenger = 86.2%*
Non-scheduled services BA Holidays

BA Service Portfolio
Other Airline Operators: Ryanair, Easyjet, Virgin Atlantic, Lufthansa, Air France KLM, Aer Lingus

Other = 6.8% Cargo Handling, Airframe Maintenance, Computer and Communication Services and Consulting Services Alliances: Quantas, AA, Iberia, Continental Investments (equity owned) Associates: Iberia S.A. 13.15% Avaliable for sale: Flybe Group Ltd 15%, Comair Ltd 10.9%

Intermediaries

Online websites

Direct Sales BA.com

Travel Agents

Customers

International Travellers: (by sales) Continental Europe = 1,219 ml The Americas = 1,697 ml Africa, Middle East & Indian subcontinent = 821 ml Far East and Australisia = 659 ml

Domestic Travellers: (by sales) UK = 4,357 ml

Independent Customer Review: Skytrax rates BA as a 4* airline.

5 Adapted from: British Airways (2010) (* percent of operations)

2.0 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. 2.1 PESTEL Analysis (Source: Johnson et al., 2010, p56) Figure 2 PESTEL Analysis An analysis of the macro-environment has been carried out using PESTEL (Figure 2).
PESTEL Factor Political Key Points Heavy regulation (AEA, 2009). Increased security due to past terrorist threats (DFT, 2010). Economic Global economic crisis: World growth is projected to just over 2 percent in 2009 (IMF, 2010). 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, 2010) UK consumer spending saw its sharpest decline for 13 years between July and September 2010 (Channel 4, 2010). The UK has an aging population (see appendix 3) (National Statistics Online, 2010). Increasing unemployment (Kollewe and Sager, 2010). 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. Noise pollution controls, and energy consumption controls (DFT, 2010). Limited land and for growing airports Expansion is difficult at Heathrow as it would result in a loss in the Londons Green belt area. (BBC News 2006) Consumers are becoming increasingly green and more aware of the environmental impact of their actions. Cancellations of flights and loss of baggage (Channel 4, 2010). Collusion and price fixing. Recognition of trade unions and industrial action e.g. Cabin Crew strikes. 7 Open Skies Agreement (AEA, 2009) 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. More intense competition Potential opportunity 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. 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. Limited capacity=> utilisation of capacity.

Social

Technological

Environmental/ Ethical

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. Good employee relations are essential if BA wants to avoid industrial action and interrupted operations. Opportunity for BA and its competitors to freely transport aircraft between the EU and US.

Legal

2.2 Porters Five Forces

(Source: Johnson et al., 2010, 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. 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, 2010). Consolidation of competitors has increased competition. 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, 2010). 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, 2010c). 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, 2010). 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

2.3 GE Matrix
(Source: Johnson et al., 2010, p280.)

The GE Matrix (Figure 5) provides evidence of opportunities for growth through market development in new markets and market penetration in existing. Figure 5 GE Matrix Competitive Strength Market Attractiveness High High Medium North America BA=1.7% Latin America BA=1.9% Low

Medium Asia Pacific BA=1.1% Western Europe BA=6.9%

Middle East and Africa BA=2.3% Low Eastern Europe BA=2.2% Australasia BA=4.0%

Size of Circle = size of market (British Airwayssed on 2006 data) Width of Circle = CAGR Forecast Growth (2006 2010) Source: Euromonitor (2010) From the analysis above, it is evident that if a market development strategy was to be pursued by BA, Asia Pacific and Eastern Europe would be prime markets for profitability due to high growth (Appendix 5/6). It may also be a requirement to build defence strategies in BAs core market, Western Europe, due to low growth and intense competition.
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3.0 Customer Analysis Over the past decade there has been increasing complexity in customer needs, as the customer has become more educated and demanding. Particularly, the following changes have occurred:

A shift in demographics to older passengers (Keynote, 2010c).

Increased global connectivity allowing the usage of internet and search mediums (e.g. comparison and review websites). Increased requirement for convenience (e.g. new destinations, quick check-in). Price has become more of a priority Segments have become more defined within their needs.

Evidence that BA is failing to respond to the changing customer landscape includes:

The amount of BA customers recommending their services reduced from 61% in 2008/09 to 59% in 2009/10 (British Airways, 2010). BA have been criticised for slow innovation (Doganis, 2006, Pg 165). Poor reliability and baggage handling (AQR)

Failed attempts to target the price conscious consumer through low cost airline operation (Eirma, 2010).

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4.0 Competitor Analysis 4.1 Strategic Groups Figure 3 Strategic Group Analysis (Source: Johnson et al., 2010, p73-77.)

LOW

PRICE

HIGH

Specialist e.g. PalmAir

Mass Service Providers e.g. BA, Virgin, NonFigure 3 illustrates that BAs direct competitors are those who operate similar services and lie within Local e.g. schedule Lufthansa, the same strategic group. The BMI competition is likely to be most intense within this group as they are e.g. AirFrance KLM seeking similardstrategies.
Thomson

Lufthansa and KLM-Air France are the 2 leading European Airlines Member carriers in terms of No-frills passenger numbers, withe.g. Ryanand 14.1% respectively of the total number of passengers carried. 15.1% BA comes in third with 9.3% of the total (Keynote, 2010c). Air, Easy Jet BA face competition from a small number of serious contenders in the UK, with the main contenders being Virgin Atlantic, and United Airlines in the Star Alliance soon controlling BMI (Euromonitor, 2010). Although they do not lie within the same strategic group as BA the advent of low-cost air LOW travel has changed the faceBREADTH OF SERVICE Airlines such asHIGH of the airline industry. Ryanair and EasyJet have established themselves among the leading carriers in Europe, whilst the more established long-haul PRICE FOCUSED MIDDLE MARKET carriers such as BA have struggled to keep up with FOCUScounterpartsOFFERINGS their ON SERVICE growth rates. Moreover the economic downturn and sharp fall in oil prices has caused a price war between Emirates, BA and Virgin Atlantic on the London-Dubai route. Fares have dropped by 30% across the airlines. Thus competition still remains fierce. Based on the strategic group analysis it could be argued that there is a gap in the market for a low cost airline operating a high breadth of service however it is likely the reason no airlines have adopted this strategy is due to the fact that it would be destined to fail. This assumption could be supported by BAs failed attempt to enter this market in recent years (Telegraph, 2002).

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4.2 Airline Quality Review (AQR) Skytrax is an independent website and therefore gives an objective view of BAs quality of service in comparison to its competitors and may highlight strategic issues that need to be addressed. Figure 4 Competitive Spider Index
Created using data sourced from Skytrax, 2010.

Website 5 Overall Rating 4 3 Responding to Requests 2 1 Interaction with Passengers 0 Assisting Families/Children British Airways Virgin Atlantic Air France KLM Service Efficiency Cabin Safety Lufthansa Handling Delays/Cancellations Check-In Services

Quality of Meals Inflight Entertainment

Seat Com fort

All ratings taken from the website are based on scale of 1 to 5 with 5 being the highest.

The overall Airline Rating for BA was 4. Its major competitors all scored 4 apart from KLM, which scored 3. BA and Virgin Atlantic are virtually identically marked in all categories with the rest less highly rated. BA is not a Quality Approved Airline, whilst Virgin Atlantic is. BA needs to improve upon its interaction with its passengers across all classes in order to outperform its nearest competitor Virgin Atlantic. BA needs to improve its baggage delivery service. Slow baggage recovery at T5 (SkyTrax, 2010). General customer reviews have shown a common theme: poor in-flight entertainment which regularly breaks down. BA needs to look at improving its online services by providing additional services all with a more personal touch. Six competitors hold a five-star rating with the independent evaluator.

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For BA to become a 5 Star Airline emphasis needs to be placed on the quality of its customer service delivery at all levels, which it has lacked in the past. This is what will differentiate itself between its main competitors.

5.0 Internal Analysis It is now essential to analyse the internal environment in order to formulate appropriate strategies. 5.1 Value Chain Analysis (VCA) BA have 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 6 Value Chain (Adapted from: Johnson et al., 2010, 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, 2010). TECHNOLOGY DEVELOPMENT BA has added value in this category over smaller companies due to slack resources that can be employed to innovate 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 High quality training accredited by City & Guilds (British Airways, 2010). Ongoing relationship with suppliers (e.g. Gate Gourmet. Increased Baggage Security. Quick check-in services and secure online bookings with ability to pre-book additional services. Customer Service Large database of airport slots enable passengers to access the majority of destinations from preferred airport. Marketing communications to all stakeholders. Brand allowing for large budget to be spent in this field. Loyalty card. club SUPPORT ACTIVITIES

Update communication on other services

Whilst the Value Chain highlights the primary and support activities that add value to BA, there are a number of inefficiencies within these activities that arguably reduce the amount of value provided (see figure 7 and 8).

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Figure 7 Support Activities Value Loss

SUPPORT ACTIVITIES

Firm Infrastructure HRM

Technology Development

Large bureaucratic infrastructure decreases effective communication and increases inertia. BAs employee opinion surveys attracted a mere 35% response rate in 2007 (British Airways, 2010). Due to high collective bargaining capabilities, BA has contended a number of highly publicised employee relations issues (e.g. Cabin Crew strike over pay, sickness absence, and staffing in 2007 (BBC News, 2007). BA has failed to gain recognition for new innovation.

Figure 8 Primary Activities Value Loss

PRIMARY ACTIVITIES

Inbound Logistics

Operations/Outbound Logistics Marketing & Sales

High solidarity between supplier employees and BA employees has created a history of negative industrial action. For example, in 2005, BA employees walked out for two days when Gate Gourmet employees were sacked (BBC News, 2005). TV documentary reported on Terminal Five operation difficulties, an emergency landing at LHR, poor baggage handling and flight cancellations (Channel Four, 2010). A lack of innovation in their marketing communications (e.g. Virgin gaining value over BA).

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5.2 Resource Based View (RBV) It is suggested that an organisations competitive advantage and superior performance is resulted from its distinctive capabilities (Johnson et al., 2010 p95). The resource based view highlighting BAs resources and competencies is outlined below.

RESOURCES Threshold Resources THRESHOLD CAPABILITIES Tangible Fleet of 245 aircraft accessing over 550 destinations (British Airways, 2010). Additional services (e.g. BA Holidays & The London Eye Company (Datamonitor, 2010)). Intangible International Customer Database. Partnerships & Alliances with oneworld (incl. American Airlines), codeshare/franchise partners, and subsidiaries. Unique Resources Tangible Sole access to LHRs Terminal 5 (BBC News, 2010). Intangible Reputable brand image. BA is recognised globally as a reputable brand, reinforced by its longstanding existence within the industry.

COMPETENCIES Threshold Competencies

Training of ground school, flight simulators, and cabin safety training (BAFT, 2009). Economies of Scale from ongoing suppliers. Ability to fly and manage passengers safely on various routes (Davies, 2000).

ADVANTAGECAPABILITIES FOR COMPETITIVE

Core Competencies

OpenSkies subsidiarys aircraft never have more than 64 passengers per flight, with one attendant per twelve customers (British Airways, 2010). First UK airline recognised as a training centre by the City & Guilds, qualifying all cabin crew with NVQ Level 2 (British Airways, 2010).

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5.3 Financial Analysis (Source: British Airways, 2008). In 2007/08, BA made post-tax profits of 694 million, an increase of 128% over the prior year. In 2006/07 profits were 304 million. The difference is mainly caused by the loss from discontinued in operations in 2006/07 of 134 million. However, the doubling in profits is also attributed to a decrease in operating costs and no credit arising on changes to the pension scheme or provisions made for settlement of completion investigations. BA has performed well in managing and reducing costs. Operating costs have risen steadily over the past 5 years and this is in-line with the increase in fuel prices and increase in landing fees/en-route charges as the company expands. In 2007/08 BA had operating costs of 7,878 million which is a 1% decrease over the prior year despite increase in fuel costs to 2,055 million and increased landing fees, handling/catering charges with Terminal 5. BA managed to reduce costs through a reduction in the number of employees by approximately 3000 people. BA online booking/reservation service helped reduce agency costs leading to a 77 million decrease in selling costs. BA efficient control of all these costs has helped put them into a strong position in relation to its competitors, especially with the current economic crisis. BA gearing ratio was at 27% in 2007/08, which is a reduction from the prior year. This reduction shows that less debt is being taken on by the firm. This could also be due to the fact that they have paid some of it back. Also, with increased liquidity to 21% from 19%, BA is a strong position in the current economic crisis and is more likely to have better relations with its suppliers and financial institutions going forward. BAs earning per share increased, reaching 59p per share. This was due to the increase in profit before tax and the reduced corporation tax rate. Figure 9 BAS Turnover, PBT, PAT

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Figure 10 BAs Fuel and Operating Costs

Overall BA remains financially stronger than its competitors. At the end of the 2007/08 financial year they were in a good position to withstand most shocks and this has been the case. They have stated that they expect an operational loss of 150 million for the 2010/09 year (IHT, 2010), due to the trading conditions and fall in value of the pound. Despite a fall in oil prices, the cost of fuel for BA will remain approximately the same due to the devaluation of the pound and the fact that fuel is bought in dollars. However, compared to its competitors it still remains in the healthiest position and will have to weather the difficult future ahead and may report losses in 2009.

6.0 Summary
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6.1 SWOT Analysis (Source: Johnson et al., 2010, 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): Internal Strengths Brand Image Partnerships & Alliances Financial size and stability Terminal 5 VCA Refer to: RBV Financial Analysis

Internal Weaknesses Poor employee relations history

Reliability and trust Innovation & change

External Opportunities SkyTrax Quality System Competitors forced exit Competitors reliability failing on delivering

AQR Porters Five Forces GE Matrix

Emergence of new markets External Threats Open Skies Agreement Environmental awareness Global economic crisis Lower cost competition

PESTEL Strategic Group Analysis

6.2 Key Strategic Issues

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Analysis Tool PESTEL

Porters Five Forces Customer Analysis

Strategic Group Analysis

Airline Quality Review

GE Matrix The Value Chain

Key Findings Global economic crisis. Higher regulatory requirements. Increasing environmental awareness. Decline in consumer spending. Increased use of the internet by customers. High competitive rivalry and bargaining power of suppliers. Consumer trends in high convenience and high expectations of service. Intense competition within strategic group and trend for consolidation. The biggest other threat comes from low cost airlines. BA = poor baggage handling, poor on flight entertainment and low customer satisfaction. Highest growth markets; Asia Pacific and Eastern Europe. BA adds value; financial size and stability, brand image, industry expertise, and partnerships and alliances. BA loses value to competition; employee relations and performance, marketing delivery, reliability, and slow innovation. Strong resources including sole access to hub within largest UK Airport. Strong training competencies. Increased profits and lower operating costs. Lower gearing ratios and higher liquidity. Possibility of a loss in 2009 as a result of the economic downturn.

Strategic Implications Focus on technological and environmental issues.

Defensive strategies needed to protect market share. Ensure changing customer needs are understood and met Although low cost airlines are the biggest threat to BA, moving into low cost market is not deemed appropriate based on previous failed attempts. Service Quality needs to be improved to gain a competitive advantage BA has a strong opportunity for market development in Asia and Eastern Europe. BA needs to address the areas where value is being lost to avoid attacking competitor strategies.

Resource Based View

Utilise BA core competences to gain competitive advantage.

Financial Analysis

Investment resources available. Increased scrutiny on strategic projects for risk assessment.

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7.0 Strategy Formulation 7.1 TOWS Matrix

(Source: Johnson et al., 2010, p367.)

A range of strategic options will now be formulated using the TOWs matrix to resolve the strategic issues highlighted from the analysis. External Opportunities Skytrax- star system of quality Competitors forced exit Competitors failing on delivering reliability Emergence of new markets Internal Strengths Brand Image Partnerships and Alliances Financial Size & Stability Terminal 5 Strategies for strengths to meet opportunities: Weaknesses Poor employee relations history Recent negative attention on reliability and trust Quick innovation and change Segment focus. Supply chain migration. Introduction of complimentary services. Broader service offering. Strategies for Weaknesses not to expose threats: Improved environmental stance. Diversify into other transport markets. Threats Open skies agreement Environmental Awareness (Climate change bill) Global Economic Crisis Lower cost competition Strategies for Strengths to defend threats: Renovation of brand image.

Strategies for opportunities to overcome weaknesses:

Improved people processes. Technological advancement.

Figure 11 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.

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Figure 11 - Preliminary Comparison of Strategies

Do BA have the financial resources? 1 = No 3= Possibly 5 = Yes 5 Effect on Brand Image. 1 = Bad 3 = No change 5 = Good 5 Effect on competence 1 = Bad 3 = No change 5 = Good In accordance with current strategy? 1 = No 5 = Yes 5 Level of risk involved? 1 = High 3 = Medium 5 = Low Score Accept for further consideration?

Strategy linked to Ansoff

Strategic Option

Explanation

1. Improvement to people processes 2. Improved environmental stance. 3. Renovation of brand image. 4. Segment focus 5. Technological advancement. 2. Product Development

Reduce current tension from negative employee and customer relations. Go above and beyond current 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. Introduction of internet access on flights to improve the overall quality of service. Offering of complimentary services such as car rental or hotels. Increase number of destinations BA flies to, focusing areas of growth such as India and China. 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.

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3 3

5 5

3 3

5 1

3 3

19 15

1. Market Penetration

5 3

5 5

3 5

1 5

5 3

19 21

3. Market Development

6. Introduction of complimentary services. 7. Broader service offering 8. Diversify into other transport markets. 9. Supply chain migration.

3 3

5 5

3 3

1 5

1 3

13 19

4. Diversification

11

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8.0 Analysis of Strategic Options Based on the analysis performed in figure 11 the five most viable strategic options will now be considered further in terms of suitability, acceptability and feasibility. 8.1 Strategic Option 1 - Improvement to People Processes Brief Outline: The analysis highlighted recent negative attention both internally and externally. The RBV and 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, 2010). 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. ACCEPTABILITY 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, 2010). FEASIBILITY The Resource Based View (RBV) illustrates an international customer database holding. Access to such data could assist BA in market research and customer relation development based on findings. The industry and organisation is highly unionised, and are likely to gain support from this external body when strategically developing employee relations. SUPPORTS STRATEGY?

SUPPORTS STRATEGY?

SUPPORTS STRATEGY?

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8.2 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 BA benefits from a sound brand image (RBV) which would be further enforced by this 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 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 Resources may be better employed elsewhere, as investing in environmental policies may not increase returns. BA must be confident that it will be able to successfully pursue such a strategy as if it fails it would be open to public scrutiny which could damage its currently strong brand image (RBV). SUPPORTS STRATEGY?

SUPPORTS STRATEGY?

SUPPORTS STRATEGY?

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8.3 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 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 (AQR). 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). BA also needs to compete with other modes of travel, e.g. Eurostar, which already have internet capabilities (AQR). By implementing the strategy, BA can modernise its image whilst maintaining traditional values (AQR).

SUPPORTS STRATEGY?

ACCEPTABILITY 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, 2010).

SUPPORTS STRATEGY?

FEASIBILITY 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.
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SUPPORTS STRATEGY?

8.4 Strategic Option 4 - Segment Focus Brief outline: Focus and tailor tactics to the business segment to combat Virgin Atlantics market share growth. SUITABILITY 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, 2010). Although the business segment is not growing as significantly in long haul as in short haul, (Keynote, 2010c), the profitability and sustainability of the customers demand provides incentive for market share growth. Through focusing on one segment BA may lose their advantage in other segments (see appendix 8). Stakeholders may view this strategy as competitor narrow focus as BA would be targeting their prime domestic competitor and challenging Virgin Atlantic at their own core competence (Competitor Analysis). SUPPORTS STRATEGY?

ACCEPTABILITY In relation to other strategies the benefit to cost ratio may not be as great. The development of database marketing in line with BAs loyalty club card in order to segment and target these business users will increase relationship marketing operations, increasing BAs failing customer service (AQR). The benefits should also be sustainable through increase brand image and preference (RBV). FEASIBILITY Competition such as Virgin, have made head way in segmentation development, however with the brand reputation of BA and the expertise within the firm can ensure success (RBV). The time frame to implement the strategy is achievable through resource allocation, as there is no immediate urgency or threat (Competitor Analysis). 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 (Competitor Analysis, SWOT).

SUPPORTS STRATEGY?

SUPPORTS STRATEGY?

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8.5 Strategic Option 5 - Broader Service Offering Brief outline: Extend flights and services to new destinations past that of BAs current strategy. SUITABILITY Utilises the core capability of BA, their service portfolio, in their core long haul market (British Airways business map). There is an increasing demand for new destinations to be reached directly by domestic and international travellers (Customer Analysis). As the pound continues to fail against the Euro, the economic advantage to travelling to other destinations is found (PESTEL). To gain significant share in the most profitable markets in the short term it may be worth focusing on a few markets as is outlined in BAs current strategy. Also the demand level of many markets is still unclear, and a phrased approach to increased destinations may be the best (GE Matrix). 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. SUPPORTS STRATEGY?

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

SUPPORTS STRATEGY?

FEASIBILITY Funding for the current strategy can be extended more easily for this aligned strategy. The resources required for a successful strategy are within the capabilities of BA (Financial Analysis). BAs brand strength accommodates globalisation and a higher probability of acceptability by new countries (RBV). Against local competition BAs brand strength may not be enough to achieve the demand needed (RBV).

SUPPORTS STRATEGY?

28

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.

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9.0 Implementation Based on the analysis of strategic options it is proposed that two strategies are implemented simultaneously. These strategies are a people processes focused strategy and technological advancement. Figure 12 details the objectives and performance measures of these two strategies. Figure 12 Strategy Overview Strategy People processes Aim: Improved stakeholder brand image & profitability Objectives Utilise databases. Improve service delivery efficiency. Improve internal communication. Implement effective review monitoring. Following succession with test internet implementation, roll out internet on-board internet access. An appropriate pricing strategy involving complimentary service for first class whilst targeting business class as the most profitable market. Continued market research to ensure that this is a valued service and seek opportunities for further development. Performance Measures Profit margin increase of 2 3%. Increase repeat purchasing by 25%. Increase customer recommendation from 59% (2007/08) to 70%. Improve employee survey rate from 35% (2007/08) to 80% (Value Chain). Install equipment on remaining 244 aircraft.

Technological advancement Aim: Customer Loyalty & Market Share

Increase business class market share by 10%. 80% of business class customers purchasing internet usage.

Following R&D implement 1 new technological service.

In order for the chosen strategies to be successful effective implementation is essential to organise and enable success and to manage the changes that will impact BA.

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9.1 Company Structure When implementing strategy, people are crucial to the success (Johnson et al., 2010), therefore the structure within BA will now be analysed to ensure successful implementation. 9.1.1 Corporate Level Structure

(Adapted from British Airways, 2010). At a corporate level, BA has a good structure already in place. There is a new Acting Customer Director on an interim basis, Silla Maizey (British Airways, 2010). She has introduced a new customer service team working with Heathrow Customer Services, designed to put customers first. Using the current structure to implement our strategy, it is recommended that a permanent and not acting director to be recruited. In terms of the technological strategy, no amendments to the current structure are necessary as BA already have systems in place to implement new technology. 9.1.2 Business Level Structure At a business level each department will need to ensure all staff implements the strategies that have come top-down from a corporate level and work within the organisations brand values. Each department must also tailor the corporate level objectives specifically to its own targets. This will help to build the brand, improve its customer relationship focus and achieve the stated objectives. 9.1.3 Functional Level Structure Every function must coordinate with each other to ensure objectives are met and an updated operations manual must be developed. Specifically for the relations strategy, detailed targets must
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be stated for both the marketing and HR functions with constant data capture and analysis to see whether the targets are being met. Sufficient training on the new onboard technology will be necessary on an ongoing basis to ensure that employees are fully familiar with the service. 9.2 Service Quality Gaps Model The Service Quality Gaps Model demonstrates the long-term strategy to improve service quality (Appendix 4). Figure 13 Application to BA Service Gap The Knowledge Gap Current Priority Low Strategy status Current Strategy in practise BA has completed extensive market research into understanding the customer (British Airways, 2010), and our assessment suggests in this fast changing environment, that it needs to be sustained. BA will soon renew their fleet (British Airways, 2010). Our recommendation is to incorporate the latest technology. This will address the current service designs failure to meet customer needs in terms of operational efficiency. The issue with the service delivery is for BA to maintain satisfied employees. Our recommendation is for BA to invest in research to understand the employees needs, responding with an adaptation in HR policy and internal marketing culture. BA appears to be losing value in the marketing delivery over competitors such as Virgin and EasyJet. A future recommendation and development strategy would be to address the external communication and ensure the promises of delivery previously corrected reach and penetrate the relevant target market.

The Design and Standards Gap

Medium

Current & recommended

The Performance Gap

High

Recommended

The Communications Gap

Medium

Future

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9.3 Managing the Change Figure 14 Types of Change Scope of Change Realignment Transformation

Incremental Nature of Change Big Bang

Adaptation

Evolution

Reconstruction

Revolution

Source: Johnson et al., 2010, p520. The shaded area of figure 14 reflects the nature and scope of change that the proposed strategies will require of BA. Adaptation will be necessary; as this is done on an incremental basis it is relatively low risk. The specific areas of change are looked at in more detail in figure 15.

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Figure 15 Contextual Features of Strategic Change

Time The improvement of people processes will not be immediate. Perceptions of the firm will take time to change. Internal surveys across employees will take time to design and analyse and be implemented. It will take longer than a year. A customer orientated approach is needed immediately to gain competitive advantage, however as this approach stems from an internal marketing philosophy full implementation may take over a year. Data capture and using this within the marketing activities could take up to two years before the full benefits are reached. Refer to Gantt Chart for a full break down.

Scope A medium degree of change is needed in implementing a people processes strategy. New systems will need to be implemented and surveys will have to be performed to assess satisfaction. Training is needed to improve customer relations. A new/reinforced firm culture needs to be implemented as a result of extensive employee satisfaction research. A low level of internal change is needed for the introduction of full internet access across the fleet. A medium level of change maybe required when it comes to carrying out research to ensure it is a valued service and in seeking opportunities for development.

Preservation The traditional brand image of BA will be maintained whilst also being modernised by an improved technological stance. Measures will be taken to preserve the employees, e.g. revised pension schemes.

Power The current top level management structure will provide the power to implement these strategies. Employees who have direct contact with customers must be given the power to obtain direct feedback. Middle managers must be given enough power to ensure some autonomy in the firm, and good communications within the firm.

People Processes, Technological Advancement.

Diversity As the nature of change is incremental and the scope of change is adaptation for both strategies, the diversity risks are minimal.

Readiness Employees will need training and education on the strategy to realise the importance of managing customer relationships and to implement the new systems. Certain employees within the flight operations/general operations/cabin crew department will have to be trained to be familiar with the new technology if anything does go wrong mid-flight.

Capacity An Acting Customer director is already in place at a corporate level, which feeds down into customer relations team. However, a permanent position over the next 3 years is recommended to ensure successful implementation. The capacity for the improved technological stance already exists. 35
Adapted from: Johnson,G., Scholes, K., and Whittington, R., Exploring Corporate Strategy, 2006, Prentice Hall, Page 508

Capability On a corporate level, the directors do have the knowledge and skills to implement both strategies. However, senior/middle managers and employees will need to be further educated. External consultants may be required for the people processes strategy and will be required for the improved technological stance strategy.

Adapted from Johnson et al., 2010, p523.

9.4 Stakeholder Map It is important to assess the expectations of different stakeholders and the extent to which they are likely to seek influence over BAs strategies. Figure 16 Stakeholder Map (Source: Johnson et al., 2010, p156.)

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INTEREST Low POWER Low Minimal Effort Charities BA donates money to a number of registered charities in the UK (British Airways, 2010) - minimal impact on the strategies. Keep Informed Creditors Must be kept informed due to money owed however this would not impact on the choices adopted at BA as they have a good credit rating (Financial Analysis). OnAIr Internet Service BA is currently testing the use of the OnAir internet service (Inmarsat, 2009). By expanding and utilising their service across the fleet would positively impact OnAir therefore they have a high interest. However they have little power as BA could move to its competitors (Row 44/Air Cell), which have already shown positive results. Key players Employees Due to service being a key part of BA image employees have the power to influence customers. They have a vested interest as BA provide their financial wellbeing. The workforce is heavily unionised, this increases the power of the employees. Competitors BAs main rivals within their strategic group have both a high interest and power in influencing BAs strategy. The oligopolistic nature of the market will affect the decisions BA make. Suppliers Two airline suppliers, Boeing and Airbus. They have a high interest and power over BA as BA is a big source of income for them and BA in turn relies upon them. With only one supplier of fuel, they too have a high interest and power over BA. This is also true for BAA the airport operator. Financial Institutions Financial support maybe required from Financial Institutions to fund these strategies and even though BA has lowered its gearing ratio and increased its liquidity. With the current conditions the institutions have great power over BA and can refuse finance. Shareholders Shareholders have a high interest due to aspiring to gain financially. They have high input into selecting board members and authorising new strategies. The shareholders must be well informed of the risks of the strategies and length of time before returns are expected and the size of those returns. Local Communities BA continues to show corporate social responsibility including environmental issues and has a high power over its direction. BA must keep the local communities satisfied as they can severely damage BAs brand image. High

High

Keep Satisfied Government/Regulators New legislation if introduced can have a great impact on the organisation but is not individualised to BA specifically. Customers Customers provide all of the sales but have low interest in how the company is managed. They still have a high impact as the goal is to attract more customers.

9.5 Control Systems Strategy Technology Review Guidelines Review the Expected Competitor reactions Premium
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Contingency in place BA will partner with a

Resource Allocation People

progress of the strategy in line with competitor intelligence, and customer feedback every 6 months.

Competitors such as Virgin are already advanced in this area, although many other competitors may look to imitate, and form alliances with either the same supplier or a cheaper manufacturer.

technology provider ensuring that they are the leaders for quality, and that BAs relationship is exclusive. If imitation occurs BA will take steps to communicate the quality and take the early adopter advantage.

Introduce technology team. Technology Combine existing and new hardware. Finance R&D, Installing and maintenance, training. Information Providing manuals to users and promotion. People Service secondments in third parties Technology Use service blueprints to outline processes. Finance Market research Information Promotion, internal communications.

People Processes

As the processes of implementing an internal marketing culture are complex, imitation is unlikely, and the culture of BA will remain unique. Although any measures competitors will make will be faster and more effective to implement due to their small size.

As competitors may take steps to head hunt BA employees, and offer benefits. Internal research => meet employee needs (strong pension/ shareholder schemes and internal marketing of the brand). This will turn internal customer Mercenaries or even terrorists into Advocates (Jones and Sasser, 1995).

9.6 Balance Scorecard The Balance Score Card (Appendix 7) is used as a tool to analyse the progress of the strategy in the review occurring every six months (Johnson et al., 2010). Whilst it highlights the strategy achievements, it additionally focuses attention to areas which may be failing, and hence need further resource allocation or a red flag to adapt the strategy. A traffic light system is utilised to categorise areas of success, monitoring, and decision making.

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10.0 Critique Although strong and justified strategies have been created within the confines of the report there are a number of issues which BA should take into consideration when implementing the proposed strategies. These are considered briefly below. 10.1 Financial BA should not have much trouble in implementing these strategies. With an increasingly lower gearing ratio and better liquidity they should be able to secure some funding from financial institutions and obtain the rest from retained profits. However, with the current economic conditions, it will still be difficult to obtain funding and BA will not want to increase its gearing too much. 10.2 People The recommended strategy to improve relations will require full support from BAs workforce. As a highly unionised workforce, success in changing the employment relationship will be determined by BAs ability to work efficiently with each recognised union. In regards to implementing change, due to BAs history and size the company may experience organisational inertia or myopia. Again, improvements to customer relations may be hindered by an uncooperative workforce, highlighting the importance of ongoing training and support. Similarly, a technological stance will require BAs employees to develop service knowledge, and it is imperative for the organisation to support them in doing so on a continual basis. 10.3 Legal The use of Wi-Fi on planes is already allowed by the aviation regulators in the UK, Europe and Rest of the World. However, regulatory approval must be achieved before it can be implemented on planes flying to/from USA (Wlanbook, 2010; Row 44, 2010). The use of external legal consultants should be used when implementing both strategies to ensure that legal requirements are met, especially when performing internal and external surveys and the confidentiality of data.

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11.0 Conclusion As a result of the external and internal analysis a number of strategic options were proposed. It was concluded that a combined strategy approach to improve service quality was deemed most suitable. Due to the current industry climate we have chosen a strategy to consolidate BAs position as market leader. Due to the scale and scope of BAs operations it was decided that the focus of this report would be on scheduled passenger flights. We would recommend further strategic analysis to implement SBU level strategies. Due to lack of primary research and restricted access to company information there may be limitations in our findings and recommended strategy, however we believe that if the general direction of our suggested strategic intent is followed it will lead to lead to success.

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Appendices Appendix 1 Real GDP Growth and Trend

Appendix 2 Jet Fuel and Crude Oil Price Trends

Source: IMF, 2010

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Appendix 3 Ageing Population (Source: National Statistics Online, 2009)

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Appendix 4 Service Gaps Model External Environment

EXPECTED SERVICE
GAP 5: Service Gap Closing Gaps 1 - 4 will help meet customers expectations and close gap 5

GAP 1 - Knowledge Gap

Closing this gap requires: Understanding and listening to customers (Market Research) Building relationships with customers Filtering feedback through vertical channels of communications

PERCEIVED SERVICE
Internal Environment

SERVICE DELIVERY
GAP 3: Delivery Gap To close this gap: Internal Research HR Policies Match supply and demand

GAP 4: Communications Gap To close this gap: Horizontal Communications Integrated marketing communications Management of Customer Expectaions

EXTERNAL COMMUNICATIONS TO CUSTOMERS

GAP 2 Standards Gap To close gap: Customer defined standards

TRANSLATION OF PERCEPTIONS INTO SERVICE DESIGN & PRECOEDURES MANAGEMENT PERCEPTIONS OF CUSTOMER EXPECTATIONS

Approved service design. Appropriate physical evidence and servicescape

Zeithaml, V, A. & Bitner, M, J. (2003)

Appendix 5 Tourist Arrivals (Source: Datamonitor, 2009)

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Appendix 6 - Travel expenditure by region (Source: Datamonitor, 2009)

44

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Appendix 7 Balance Score Card (Source: Garrison et al., 2003.)

Financial Perspective CSF Measures - Sales growth Improved - End of year financial financial performance accounts - Profitability and liquidity ratios Shareholder value - Share price - Dividends per share

Customer Perspective CSF Measures - Quality control Quality of airline service Customer service - Customer feedback - Customer questionnaires and feedback - Customer feedback - Increased passenger volumes

Increased brand awareness

Internal Perspective CSF Measures Security and - Positive speed of feedback check-in - Time efficiency services of check-in service

Innovation and learning perspective CSF Measures - Staff Integration of UK motivation and emerging market cultures - Increase spending in R&D

Customer orientated

- Increased sales volumes - Profitability of airline competitors in the new markets

Investment into technological innovation Highly skilled staff

- Spending on staff training

Expansion into new markets

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Appendix 8 Airline Segmentation Matrix

Price Premium Virgin Medium BA First Choice, Thomas Cook Ryan Air, Easy Jet Domestic

Low

Short-Medium Haul Focus of Service Provided

Long Haul

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