AN APPLICATION OF DAVIDS STRATEGY FORMULATION FRAMEWORK TO THE TURKISH AIRLINES ON DOMESTIC AIR TRANSPORTATION OPERATIONS

Thesis submitted to the Institute of Social Sciences in partial fulfillment of the requirements for the degree of Master of Arts in Management by Mehmet ANAL Fatih University

June 2007

 Mehmet ANAL All Rights Reserved, 2007

ii

To my wife, Nesibe

APPROVAL PAGE

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I certify that this thesis satisfies all the requirements as a thesis for the degree of Master of Arts.

Assist. Prof. Dr. N. Gkhan Torlak Department Chair This is to certify that I have read this thesis and that in my opinion it is fully adequate, in scope and quality, as a thesis for the degree of Master of Arts. Assist. Prof. Dr. N. Gkhan Torlak Supervisor Examining Committee Members Assist. Prof. Dr. N. Gkhan TORLAK Prof. Dr. Vildan SERN Assoc. Prof. Dr. Selim ZAM . . .

It is approved that this thesis has been written in compliance with the formatting rules laid down by the Graduate Institute of Social Sciences.

Assoc. Prof. Dr. Mehmet ORHAN Director Date June 2007

AUTHOR DECLARATIONS

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1. The material included in this thesis has not been submitted wholly or in part for any academic award or qualification other than that for which it is now submitted. 2. The program of advanced study of which this thesis is part has consisted of: i) Research Methods course during the undergraduate study

ii) Examination of several thesis guides of particular universities both in Turkey and abroad as well as a professional book on this subject.

Mehmet ANAL June, 2007

ABSTRACT Mehmet ANAL June 2007

AN APPLICATION OF DAVIDS STRATEGY FORMULATION FRAMEWORK TO THE TURKISH AIRLINES ON DOMESTIC AIR TRANSPORTATION OPERATIONS
This thesis focuses on a modern strategy formulation framework formed by Fred David in the strategic management process. This framework guides strategists to evaluate firms internal strengths/weaknesses and external opportunities/threats, to reach alternative strategies for the firms by using many different tools and models and to choose the best strategy for the firms. The tools presented in this framework are applicable to all sizes and types of organisations and can help strategists identfy, evaluate, and select strategies. In this study the author has designed the case study of the Turkish Airlines on Domestic Air Transportation, applied the Davids strategy formulation framework to the Turkish Airlines on Domestic Air Transportation Operations, and suggested the most applicipable strategy(ies) to the firm.

Key words: decision stage mission strategy analysis strategy formulation strategic management vision

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KISA ZET Mehmet ANAL Haziran 2007

DAVDN STRATEJ FORMLASYON MODELNN TRK HAVA YOLLARININ HAT HAVA YOLU TAIMACILII FAALYETLER ZERNE BR UYGULAMASI
Bu tez, Fred David tarafndan gelitirilen stratejik ynetim sreci iindeki modern strateji modelini ele almtr. Bu model firmalarn isel gl yanlarn, zayflklarn, frsatlarn ve tehditlerini deerlendirmek, birok farkl ara ve modeli kullanarak firmalar iin alternatif stratejilere ulamak ve firmalara en iyi stratejiyi semek iin stratejistlere rehberlik eder. Bu modelde ortaya konan aralar, her eit ve byklkteki firmalar iin uygulanabilir. Bu model ayn zamanda stratejileri tanmlamak, deerlemek ve semek iin stratejistlere yardm eder. Bu almada yazar, Trk Hava Yollarnn i hat hava yolu tamacl faaliyetlerinin vaka almasn oluturmu, Trk Hava Yollar i hat hava yolu tamacl faaliyetlerine Davidin strateji modelini uygulam ve firmaya en uygun strateji(leri) tavsiye etmitir.

Anahtar Kelimeler karar safhas misyon Strateji analizi Strateji formlasyonu Stratejik Ynetim vizyon

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ACKNOWLEDGEMENTS
I gratefully acknowledge all those who have contributed to the presentation of this thesis. I owe my special thanks to my thesis advisor Gkhan Torlak for his valuable supervision, interest, suggestion, and patience throughout this study. This thesis may not have been completed without his help, contributions, and constructive criticism. I am indebted to my wife cause without her encouragements maybe I would not find any motivations to begin with writing this thesis.

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LIST OF CONTENTS
Dedication Page.........iii Approval Page...........iv Author Declarations.......v Abstract.........vi Ksa zet............vii Acknowledgements..........viii List of Contents.........ix List of Tables......xiii List of Figures.......xiv INTRODUCTION.........1 PART I: THEORETICIAL DESCRIPTION...........5 CHAPTER 1..........5 WHAT IS STARTEGIC MANAGEMENT?...................................................5 1.1. The Historical Foundation of Strategic

Management.......................5 1.2. Defining Strategic

Management.......................................................6 1.3. The Stages of Strategic

Management..............................................7

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1.4.

The

Strategic-Management

Model...................................................8 CHAPTER 2.......................................11 STRATEGIC MANAGEMENT PROCESS................................................11 2.1. Strategy

Formulation.......................................................................11 2.1.1.The Business Mission and Mission Statement........................11 2.1.2. The Business Vision and Vision Statement...........................14 2.1.3. The External Assesment.....................................................15 2.1.4. The Internal Assesment.....................................................21 2.1.5. Strategies In Action: Types of Strategies.............................22 2.1.6. Strategy Analysis and Choice..............................................30 2.2. Strategy Implemetation............................................................30 2.3. Strategy Evaluation..................................................................31 CHAPTER 3........................................................................................33 STRATEGY ANALYSIS AND CHOICE.....................................................33 3.1. Comprehensive Strategy-Formulation Framework........................33 3.1.1. The Input Stage................................................................34 3.1.2. The Matching Stage...........................................................39 3.1.3. The Decision Stage............................................................54 PART II: PRACTICE...........58 CHAPTER 4........................................................................................58

THE DESCRIPTION OF THE TURKISH AIRLINES ON DOMESTIC AIR TRANSPORTATION OPERATIONS.......................................................58 4.1. The History of Turkish Airlines..............58 4.2. Chief Characteristics of Turkish Airlines on Domestic Air Transportation Operations..................59 4.2.1. The Turkish Airlines Passenger Function........59 4.2.2. The Turkish Cargo Function................60 4.2.3. Mission Statement................61 4.2.4. Organisational Structure...............61 4.2.5. Fleet......................62 4.2.6. Destinations of Turkish Airlines on Domestic Flights........64 4.2.7. Maintenance Centre.............65 4.2.8. E-commerce.............65 4.2.9. Accidents............65 4.2.10. Financial Condition.............66 4.3. The Turkish Aviation Industry....................................................70 4.3.1. The Nature of The Turkish Aviation Industry........................70 4.3.2. The Fuel Prices in the Aviation Industry...............................72 4.3.3. The Competition in the Turkish Domestic Air Transportation.............72 CHAPTER 5........................................................................................71 THE APPLICATION OF THE STRATEGY FORMULATION FRAMEWORK TO THE TURKISH AIRLINES ON DOMESTIC AIR TRANSPORTATION.............................................................................75

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5.1. The Input Stage......................................................................76 5.2. The Matching Stage.................................................................79 5.3. The Decision

Stage......................................................................87 CONCLUSION........................................................................................89 BIBLIOGRAPHY.....................................................................................94

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LIST OF TABLES
Table 3.1. External Factor Evaluation Matrix.............................................36 Table 3.2. Internal Factor Evaluation Matrix..............................................37 Table 3.3. Competitive Profile Matrix........................................................38 Table 3.4. The Quantitative Strategic Planning Matrix................................57 Table 4.1. Table 4.1. Turkish Airlines Balance Sheets as at 31 December 2006 and 2005...............................................67 Table 4.2. Turkish Airlines Balance Sheets as at 31 December 2006 and 2005..............................................68 Table 4.3. Turkish Airlines Statements of Income for the Years Ended 31 December 2006 and 2005....................69 Table 4.4. Number of Domestic Passenger Carried in 2006........................73 Table 5.1. EFE Matrix for the Turkish Airlines on Domestic Air Transportation..................................................................76 Table 5.2. IFE Matrix for the Turkish Airlines on Domestic Air Transportation..................................................................77 Table 5.3. Competitive Profile Matrix for the Turkish Airlines on Domestic Air Transportation...............................................78 Table 5.4. SWOT Matrix for the Turkish Airlines on Domestic Air Transportation........................................................................81 Table 5.5. Factors That Make Up the SPACE Matrix Axes for the Turkish Airlines on Domestic Air Transportation....................................81 Table 5.6. SBUs in Terms of Sales and Profits in Turkish Airlines on Domestic Air Transportation.......83 Table 5.7. SBUs in Terms of Sales and Profits in Turkish Airlines on Domestic Air Transportation....84 Table 5.8. QSPM for Turkish Airlines on Domestic Air Transportation.....88

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LIST OF FIGURES
Figure 1.1. Comprehensive Strategic Management Model.........................10 Figure 2.1.The Five-Forces Model of Competition......................................17 Figure 2.2. Porters Generic Strategies......................................................28 Figure 3.1. Strategy-Formulation Framework............................................33 Figure 3.2. The SWOT Matrix...................................................................41 Figure 3.3. Strategic Position and Action Evaluation Matrix.........................45 Figure 3.4. Boston Consulting Group Matrix..............................................47 Figure 3.5. The Internal-External Matrix...................................................51 Figure 3.6. Grand Strategy Matrix............................................................53 Figure 4.1. Turkish Airlines Organisation Chart..........................................62 Figure 4.2. Turkish Airlines Fleet..............................................................63 Figure 4.3. Destinations of TA on Domestic Flights.........64
Figure 5.1. SPACE Matrix for the Turkish Airlines on Domestic Air

Transportation........................................................................82

Figure 5.2. BCG Matrix for Turkish Airlines on Domestic Air Transportation..................................................................83 Figure 5.3. IE Matrix for the Turkish Airlines on Domestic Air Transportation.......................................................................85 Figure 5.4. The Grand Strategy Matrix for Turkish Airlines on Domestic Air Transportation..............................................86

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INTRODUCTION
Strategic management is that set of managerial decisions and actions that determines the long-run performance of a corperation. Strategic management is the science of formulating, implementing, and evaluating cross-functional decisions that enable an organisation to achieve its objectives. An organisations ability to strengthen its strategic position is dependent on one important factor, its ability to create the strategies that produce the desired results. An effective strategy formulation process should enable an organisation to create strategies and solutions that will strengthen its strategic position. An ineffective strategy formulation process negatively impacts an organisations rate of growth and overall competitive position. An effective strategy formulation process may in itself become a competitive advantage. Staretgy formulation includes developing a vision and mission, identifying an organisations external opportunities and threats, determining internal strengths and weaknesses, establishing long-term objectives, generating alternative strategies, and choosing particular strategies to pursue.

The aim of this study is to examine an applicability of a comprehensive strategy formulation framework developed by Fred David at the Turkish Airlines on Domestic Air Transportation Operations.

Chapter one, called What is Strategic Management, handles the historical foundation of the strategic management, the definition and the stages of the strategic management, and finally a comprehensive strategic management model.

Chapter two, called Strategic Management Process, deals with the strategy formulation, strategy implementation and strategy evaluation activities. Strategy formulation activities include, firstly, forming mission and vision statements, assessment of internal and external environment, identfying alternative strategies, and choosing the best strategy for the organisation. Strategy implementation is the sum total of the activities and choices required for the execuation of a strategic plan. It is the process by which strategies and policies are put into action through the development of programme and procedures. Strategy evaluation is the systematic documentation of the consequences of using the strategic planning process and the determination of its worth in order to make decisions.

Chapter

three,

called

Strategy

Analysis

and

Choice,

examines

comprehensive strategy-formulation framework that helps strategists generate feasible alternatives, evaluate those alternatives, and choose a specific course of action. This framework consists of three stages: (1) input stage, (2) matching stage, and (3) decision stage. Stage 1 of the formulation framework includes

the External Factor Evaluation (EFE) Matrix, the Internal Factor Evaluation (IFE) Matrix, and the Competitive Profile Matrix (CPM). Input Stage summarise the basic input information needed to formulate strategies. Stage 2, called the Matching Stage, focuses upon generating feasible alternative strategies by aligning key external and internal factors. Stage 2 techniques include the Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix, the Strategic Position and Action Evaluation (SPACE) Matrix, the Boston Consulting Group (BCG) Matrix, the Internal-External (IE) Matrix, and the Grand Strategy Matrix. Stage 3, called the Decision Stage, involves a single technique, the Quantitative Strategic Planning Matrix (QSPM). A QSPM reveals the relative attractiveness of alternative strategies and thus provides objective basis for selecting specific strategies.

Chapter four, called The Description of the Turkish Airlines on Domestic Air Transportation Operations, explains the company in terms of its history, main features, and aviation industry.

Chapter five, called The Application of the Strategy Formulation Analytical Framework to the Turkish Airlines on Domestic Air Transportation Operations, uses the formulation framework in the Turkish Airlines on Domestic Air Transportation and proposes the best strategy from amongst alternative strategies to the company.

In the conclusion part, the thesis will be summarized, the positive and negative aspects of the strategy formulation framework will be discussed, and then future research areas will be pointed up.

PART I: THEORETICIAL DESCRIPTION

CHAPTER 1 WHAT IS STRATEGIC MANAGEMENT?

This

chapter

focuses,

firstly,

the

historical

foundation

of

strategic

management, definition and stages of the strategic management, and, lastly, presents a strategic management model. 1.1. The Historical Foundation of Strategic Management The concept of strategic management is of political and military origin. The origin of the English strategy comes from the Greek strategos or a general, with the Greek verb stratego implying to plan the destruction of ones enemies through effective use of resources (Jeffery, 1980). This is why many of the business terms traditionally used in strategic management were developed by the military, such as mission, objectives, strategies,strengths, and weaknesses. Over the past decades, strategic management has primarly been developed in the business sector, promoted by the modern writers such as Von Neumann and Morgenstern in the late 1940s (Hopkins, 1987). One formulation of strategic management was being developed in the late 1940s and early 1950s with planning as the center for these early strategic management approaches (Hopkins, 1987). In the 1980s strategic management acknowledges the importance of strategic formulation, implementation, and control as the model to managing complex organisations within competitive environments.

Today, Strategic Management is a new perspective of thinking not only in terms of internal operations but also in terms of external environmental assessment. It focuses on creating a fit between the organisations external environment (political, economic, technological, social, and competitive forces) and its internal situation (vision, values, culture, finance, organisation, human resources, marketing, information systems). 1.2. Defining Strategic Management One definition of strategic management is the set of decisions and actions resulting in formulation and implementation of strategies designed to achieve the objectives of an organisation (Pearce and Robinson, 1988). From another viewpoint , Thompson and Strickland (2003) define strategic management as the managerial process of forming a strategic vision, setting objectives, crafting a strategy, implementing and executing the strategy, and then over time initiating whatever corrective adjustments in the vision, objectives, strategy, and execution are deemed appropriate. Walker (2004) summarizes strategic planning as the formulation of the overall strategy or direction of the organisation to achieve a mission or vision, translating the results into operational terms. This includes establishing clarifying assumptions of the external and internal environment, developing guidelines to drive decision processes especially at the level of the single

business unit, and converting strategic thinking into action agendas with assigned responsibilities and allocation of resources. According to David (2007), strategic management is the art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organisation to achieve its objectives. As this definition implies, strategic management focuses on integrating management, marketing,

finance/accounting, production/operations, research and development, and development, and computer information systems to achieve organisational success. 1.3. The Stages of Strategic Management The strategic-management process consists of three stages: strategy formulation, strategy implementation, and strategy evaluation: Staretgy formulation includes developing a vision and mission, identifying an organisations external opportunities and threats, determining internal strengths and weaknesses, establishing long-term objectives, generating alternative strategies, and choosing particular strategies to pursue. Strategy implementation often is called the action stage of strategic management (David, 2007). Strategy implementation requires a firm to establish annual objectives, devise policies, motivate employees, and allocate resources so that formulated strategies 7 can be execuated. Strategy

implementation includes developing a strategy-supportive culture, creating an effective organisational structure, redirecting marketing efforts, preparing budgets,developing and utilizing information systems, and linking employee compensation to organisational performance. Strategy evaluation is the final stage in strategic management. Managers need to know when particular strategies are not working well; strategy evaluation is the primary means for obtaining this information. The fundamental strategy-evaluation activities are (1) reviewing external and internal factors that are bases for current strategies, (2) measuring performance, and (3) taking corrective actions. 1.4. The Strategic Management Model Methods and processes for strategy development and implementation vary widely among business organisations. There does not appear to be any generally used format for determining and applying strategy. Organisations differ in processes they use to formulate and direct their strategic management activities. Strategic management models vary in formality and the level of detail. However, the basic components of the strategic management model are similar in all models. The strategic management process can best be studied and applied using a model. A useful integrated model of strategic management has been developed

Perform External

by Fred R. David who has published many of the writings in strategic management. The framework illustrated in Figure 1.1. is a widely accepted, comprehensive model of the strategic management process. This model is a dynamic and continuous. A change in any one of the major components in the model can necessiate a change in any or all of the other components.

Audit

Establish Develop Vision and Mission Statements Longterm Objectives

Evaluate and Select Strategies

Implement Strategies Management Issues

Implement Strategies marketing finance accounting,R&D Issues

Measure and Evaluate Performance

Perform Internal Audit

Strategy Formulation

Strategy implementation

Strategy evaluation

Figure 1.1. Comprehensive Strategic Management Model (David, 1988)

CHAPTER 2 STRATEGIC MANAGEMENT PROCESS

The strategic management process can be broken down into three main activities: strategy formulation, strategy implementation, and strategy

evaluation. This chapter examines these three activities. 2.1. Strategy Formulation Strategy formulation activities include, firstly, forming mission and vision statements, assessment of internal and external environment, identfying alternative strategies, and, lastly, choosing the best strategy for the organisation. This section describes these activities. 2.1.1.The Business Mission and Mission Statement

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Mission can be viewed as the cornerstone of organisational culture and a critical tool for motivating employees to pursue institutional goals by providing meaning to their work. Mission is the why of an organisation. The mission of a business reflects the essence of that business. According to Drucker (1973), a business is not defined by its name, statutes, or articles of incorporation. It is defined by the business mission. Only a clear definition of the mission and purpose of the organisation makes possible clear and realistic business objectives. In the field of strategic management, mission statement is generally known that the first step in the strategic planning in determining the mission of the organisation (Thompson and Strickland, 1996). There are various versions of mission statement definition in management literature. A mission statement attempts to articulate the business mission. It tries to convey the identity, purpose and direction of a business in a concise and simple manner ( Leuthesser and Kohli, 1997). A mission statement broadly charts the future direction of an organisation. A good mission statement describes an organisations purpose, products and services, markets, and basic technology. A mission statement establishes the values, beliefs, and guidelines for the way the organisation conducts its business and determines its relationships with 11

its stakeholdersemployees, customers, shareholders, suppliers, government, and the community (Ackoff, 1987). A mission statement reveals the long-term vision of an organisation in terms of what it wants to be and who it wants to serve (David, 1989). Mission statements are often regarded as enduring statements of purpose that distinguish one business firm from others. A well-designed mission statement is essential for formulating, implementing, and evaluating business strategy (David, 2001). As Kemp and Dwyer (2003) stated that a clear mission statement is important to sound strategic management of an organisation for several reasons: First, a clear mission statement is needed before alternative strategies can be formulated, implemented, and evaluated. Only a clear definition of the mission and purpose of an organisation makes it possible to formulate realistic business objectives, providing useful criteria for choosing between strategies. Second, a clear mission statement can provide a basis or standard for allocating organisational resources, providing managers with a common

direction that should transcend individual, departmental and transitory needs. Third, a clear mission statement describes the values and priorities of an organisation. A clear mission statement can help to establish a general tone or organisational climate which can serve as a focal point for individuals to identify 12

with the organisations purpose and direction and to indicate standards of behaviour expected from them (Klemme and Sanderson &Luffman (1991). Fourth, the mission statement can be an effective vehicle for communicating with important internal and external stakeholders. Stakeholders are groups, both inside and outside the organisation, with an interest in its fortunes. They are those individuals or groups who depend on the organisation to fulfil their own goals and on whom,in turn, the organisation depends. They include such external groups as customers, sup pliers, shareholders, invest ors, government agencies,and the general public (David, 2001). Generally the content is essential to a meaningful mission statement, and the statement has to be clearly and concisely articulated. The clear presentation of concepts then become essential to the missions overall effectiveness (David, 2001). 2.1.2. The Business Vision and Vision Statement A Vision should be expressed that describes what the organisation looks like, how it functions, and how it behaves. Generally, the vision expresses the desired future state of the business from the participants viewpoint. Hammer and Champy (1993) claim that a powerful vision should be both qualitative and quantitative, and contain three elements: it should focus on

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operations, it should include measurable objectives and metrics, and finally it should change the basis for competition in the industry. David (2007) indicates that many organisations today develop a vision statement that answers the question what do we want to become?. Developing a vision statement is often considered the first step in strategic planning, preceding even development of a mission statement. Many vision statements are a single sentence. A vision statement describes where the organisation wants to be at a specific future point. It does not restate the mission, but incorporates the mission as a statement of the present. It serves to inspire and focus the efforts of the organisation. 2.1.3. The External Assessment An organisations external forces can be classified into two groups; the industrial environment and the macro-environment. The industrial environment includes competitors, customers, and suppliers, which directly affect the organisation. The macro-environment comprises 1) economic forces, 2) social, cultural, demographic, and environmental forces, 3) political, governmental, and legal forces, 4) technological forces and, 5) competitive forces (David, 2007). Hill and Jones (1989) indicate that many of these environmental factors are

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constantly changing, and the change process itself gives rise to new opportunities and threats. Hill and Jones (1989) also note the fit between organisational environments and the strategic choices: For an organisation to succeed, its strategy must be consistent with the external environment. Superior performance is the product of a good fit between strategy and environment. To achieve a good fit, managers must first understand the forces that shape competition in the external environment. In order to analyze external environment and competitors Michael Porter (1979) presented a clear and intuitive model to be used by industry as a tool to help decide if a particular industry should be entered or expand their established operations. He called his model the five-forces model.

Competitive Analysis: Porters Five- Forces Model A widely used technique for the analysis of market competition is the Michael Porter's five forces model. It provides a framework for structural analysis of industries. The advantage of using Porter's model as a framework for strategic analysis is to consider different factors within the five forces so as to provide a more complete map about their level of strategic competitiveness. (Yeo and Huang, 2003). 15

Figure 2.1. The Five-Forces Model of Competition (Porter, 1979) Porter suggests that market competition is a function of five major forces. These are: Rivalry among existing firms Bargaining power of buyers Bargaining power of suppliers Threat of potential entrants Threat of substitutes

Four forces -bargaining power of customers, the bargaining power of suppliers, the threat of new entrants, and the threat of substitute products -

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combined with other variables to influence a fifth force, the level of competition in an industry. Each of these forces has several determinants: Rivalry among Existing Firms: The intensity of rivalry between competitors in an industry will depend on: - The structure of competition. Rivalry is more intense where there are many small or equally sized competitors; rivalry is less when an industry has a clear market leader. - The structure of industry costs. Industries with high fixed costs encourage competitors to fill unused capacity by price cutting. - Degree of differentiation. Industries where products are commodities (e.g. steel, coal) have greater rivalry; industries where competitors can differentiate their products have less rivalry. - Switching costs are the one-time costs customers incur when buying from a different supplier. When a customer can freely switch from one product to another there is a greater struggle to compute customers. - Strategic objectives. When competitors are pursuing aggressive growth strategies, rivalry is more intensive. - Exit barriers are economic, strategic, and emotional factors causing companies to remain in an industry even though the profitability of doing so may be in question. When barriers to leaving an industry are high (e.g. the cost of closing down factories), the competitors tend to exhibit greater rivalry.

Bargaining Power of Buyers 17

Buyers are the people / organisations who create demand in an industry. The bargaining power of buyers is greater when there are few dominant buyers and many sellers in the industry, products are standardised, buyers threaten to integrate backward into the industry, suppliers do not threaten to integrate forward into the buyer's industry, and the industry is not a key supplying group for buyers Bargaining Power of Suppliers Suppliers are the businesses that supply materials & other products into the industry. The cost of items bought from suppliers (e.g. raw materials, components) can have a significant impact on a company's profitability. If suppliers have high bargaining power over a company, then in theory the company's industry is less attractive. The bargaining power of suppliers will be high when there are many buyers and few dominant suppliers, there are undifferentiated, highly valued products, buyers do not threaten to integrate backwards into supply and, the industry is not a key customer group to the suppliers Threat of Potential Entrants Potential entrants to an industry can raise the level of competition, thereby reducing its attractiveness. The threat of potential entrants largely depends on the barriers to entry. High entry barriers exist in some industries (e.g.

18

shipbuilding) whereas other industries are very easy to enter (e.g. restaurants). Key barriers to entry include: - Economies of scale is referred to as the quantity of a product produced during a given time period increases, the costs of manufacturing each unit declines. - Capital requirements. Competing in a new industry requires resources to invest. Capital is needed for every critical business functions and inventories. - Access to industry distribution channels - The likelihood of retaliation from existing industry players. Threat of Substitutes The presence of substitute products can lower industry attractiveness and profitability because they limit price levels. The threat of substitute products depends on buyers' willingness to substitute, the relative price and performance of substitutes and, the costs of switching to substitutes.

2.1.4. The Internal Assessment The internal analysis is composed of five major areas of evaluation that relate to the overall capability of the firm. Those areas are: Management finance/accounting, Development. marketing, production/operations, and Research and

19

The function of management consist of five basic activities: planning, organizing, motivating, staffing, and controlling.

The functions of finance/accounting comprise three decisions. First, the investment decision is the allocation and reallocation of capital and resources to projects, products, and divisions of an organisation. Second, dividend decisions concern issues such as the percentage of earnings paid to stockholders, the stability of dividends paid over time, and the purchase of stock. Third, the financing decisions determines th best capital structure for the firm and includes examinig various methods by which the firm can raise capital (Horne, 1974).

The function of marketing can be described as the process of definig, anticipating, creating, and fulfilling customers needs and wants for products and services (David, 2007). There are seven basic functions of marketing: (1) customer analysis, (2) selling products/services, (3) product and service planning, (4) pricing, (5) distribution, (6) marketing research, and (7) opportunity analysis (Evans and Bergman, 1982).

The production/operations function of a business consists of all those actvities that transform inputs into goods and services.

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Production/operations management comprises five decision areas: process, capacity, inventory, workforce, and quality. Research and Development (R&D) is discovering new knowledge about products, processes, and services, and then applying that knowledge to create new and improved products, processes, and services that fill market needs. 2.1.5. Strategies In Action: Types of Strategies Alternative strategies that an enterprise could pursue can be categorized into six actions; (1) integration strategies (forward integration, backward integration, horizontal integration), (2) intensive strategies (market penetration, market development, product development), (3) diversification strategies (related diversification, unrelated diversification), (4) defensive strategies

(retrenchment, divestiture, liquidation), (5) Michael Porters generic strategies, and (6) joint venture. 1. Integration Strategies There are two kinds of integration strategies. These are: vertical integration and horizontal integration. Vertical Integration

21

Vertical integration can be viewed as the extent to which a firm controls the production of its inputs or suppliers and the distribution of its output or finished products (Mpoyi, 2003). Vertical integration can occur in two directions: - Forward integration; where the firm takes ownership and control of its own customers (Sadler, 1993). Through forward integration, a manufacturer has guaranteed access to distribution channels for its new products. example of this is a movie studio that also owns a chain of theaters. An

- Backward integration; where the firm takes ownership and control

of producing its own inputs (Sadler, 1993). For example, an automobile company may own a tire company, a glass company, and a metal company. Horizontal Integration

When a company expands its business into different products that are similar to current lines. For example, a book publisher might acquire another publishing house to increase its stable of editors and authors or to otherwise enhance its competitiveness. 2. Intensive Strategies: Market penetration, market development, and product development are referred to as intensive strategies because they require intensive efforts if a firms competitive position with existing products is to improve.

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Market Penetration

Market penetration is an effort to increase companys sales without departing from an original product-market strategy. The company seeks to improve business performance either by increasing the volume of sales to its present customers or by finding new customers for present products (Ansoff, 1957). This strategy includes increasing the number of salespersons, increasing advertising expenditures, offering extensive sales promotion items, or increasing publicity efforts (David, 2007). For example, firms use the web to sell existing products in new markets. Market Development

Market development is a strategy in which the company attempts to adopt its present product line (generally with some modification in the product characteristics) to new missions (Ansoff, 1957). An airline company, which adapts and sells its passenger transport for the mission of cargo transportation is an example of this strategy Product Development

Product development is a strategy that seeks increased sales by improving or modifying present products or services. Product development usually entails large research and development expenditures (David, 2007). The idea is to

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attract satisfied customers to try new products as a result of their positive experience with the companys initial product offering (Pearce, 1982). 3. Diversification Strategies Diversification is a product-market strategy based on a new product or service offers in a new market (or markets) (Morden, 1999). This is a shift into either new products, new markets, new channels to market, new technologies, new geographic domains or into new competencies (or into a combination of some of these) (Grundy, 2003). There are two general types of diversification strategies: related and unrelated diversification strategies. Related Diversification

Related diversification refers to diversification into a new activity that is linked to a companys existing activity by commanality between one or more components of each activitys vale chain. Normally, these linkages are based on manufacturing, marketing, materials management, and technological

commanolities (Charles and Jones, 1989). A publishing company, for instance, might diversify into the making of programmes for television and radio for which it can produce stories and scripts. Unrelated Diversification

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Unrelated diversification refers to diversification into a new activity that has no obvious commonalities with any of the companys existing activities (Charles and Jones, 1989). Firms that employ unrelated diversification continually search across different industries for companies that can be acquired for a deal and yet have potential to provide a high return on investment (David, 2007). For example a food processing firm may manufacture leather footwear as well. 4. Defensive Strategies There are three kinds of defensive strategies. They are: retrenchment, divestiture and liquidation. Retrenchment

Retrenchment occurs when an organisation regroups through cost and asset reduction to reverse declining sales and profits. Retrenchment is designed to fortify an organisations basic distinctive competence (David, 2007).

Retrenchment can entail selling off land and buildings to raise needed cash, pruning product lines, closing marginal businesses, closing obsolote factories, automating processes, reducing the number of employees, and instituting expense control systems. Divestiture

25

A divestiture strategy is the marketing for sale of a business or a major component of a business. When a retrenchment strategy fails, strategic managers often decides to sell the business (Pearce, 1982). Divestiture can take either of two forms. The parent can spin off a business as a financially and managerially independent company in which the parent company may or may not retain partial ownership. Or the parent may sell the unit outright, in which case a buyer needs to be found (Thompson and Strickland, 1996). Liquidation

Selling all of a companys assets, in parts, for their tangible worth is called liquidition. Liquidition is a recognition of defeat and consequently can be emotionally difficult strategy. The benefit of liquidation is that the board of directors, as representatives of the shareholders, together with top

management make the decisions instead of turning them over to the court, which may choose to ignore shareholders completely (Thompson and Strickland, 1996). 5. Michael Porters Generic Strategies Michael Porter presented his generic strategies for businesses to consider relating to winning and sustaining competitive advantage. The main theme of Porters strategies was to create sustainable competitive advantages. A firm's relative position within its industry determines whether a firm's profitability is

26

above or below the industry average. The fundamental basis of above average profitability in the long run is sustainable competitive advantage. There are two basic types of competitive advantage a firm can possess: lower cost or differentiation. The two basic types of competitive advantage combined with the scope of activities for which a firm seeks to achieve them, lead to three generic strategies for achieving above average performance in an industry: cost leadership, differentiation, and focus as shown in Figure 2.2.:

COMPETITIVE ADVANTAGE Differentiation Industrywide COMPETITIVE SCOPE Particular Segment Only DIFFERENTIATION COST LEADERSHIP Lower Cost

FOCUS Figure 2.2. Porters Generic Strategies

Cost leadership strategy is mostly about minimizing costs by achieving economies of scale and scope. Hence, one must pay special attention to costs associated with parts, labor, and overhead, besides making sure that a high level of capacity is being utilized (Thompson and Strickland, 1995).

Differentiation strategy is about offering a unique product that customers desire

27

and value. The organisations effort must be geared towards offering a product that is distinct from its competitors product (Thompson and Strickland, 1995). However, this strategy is also associated with costly activities such as higher R&D expendtures, higher inventory levels, and greater marketing and distribution costs. Focus strategy is directed toward serving the needs of a limited customer group or segment. In other words, a focused company concentrates on serving a particular market niche, which may be defined geographically or by the type of customer or by segment of the product line. 6. Joint Venture A joint venture is founded through the creation of a separate legal entity to complete a one-time project that is owned, operated and controlled by simultaneous contractual agreements between the founding organisations (Kukalis and Jungemann, 1995). Joint ventures are also widely used by companies to gain entrance into foreign markets. Foreign companies form joint ventures with domestic companies already present in markets the foreign companies would like to enter. The foreign companies generally bring new technologies and business practices into the joint venture, while the domestic companies already have the relationships and requisite governmental documents within the country along with being entrenched in the domestic industry

28

2.1.6. Strategy Analysis and Choice Strategy analysis and choice is the evaluation of alternative strategies and selection of the best alternative. These activities seek to determine alternative courses of action that could best enable the firm to achieve its mission and objectives. The firms present strategies, objectives, and mission, coupled with the external and internal audit information, provide a basis for generating and evaluating feasible alternative strategies (David, 2007). 2.2. Strategy Implemetation Strategy implementation is the sum total of the activities and choices required for the execuation of a strategic plan. It is the process by which strategies and policies are put into action through the development of programs and procedures (Wheelen and Hunger, 2004). According to Price and Newson (2003), strategy implementation is concerned with the translation of strategy into organisational action through organisational structure and design, resource planning and the management of strategic change.. Formulating the right strategies is not enough for the success of the strategies, because managers and employees must be motivated to implement those strategies. Management issues considered central to strategy

implementation include matching organisational structure with strategy, creating an organisational climate conductive to change, managing political relationship,

29

adapting production/operations processes, and managing human resources. Establishing annual objectives, devising policies, and allocating resources are central strategy implementation activities common to all organisations. Successful strategy implementation also depends on cooperation among all functional and divisional managers in an organisation. Marketing departments are commonly charged with implementing strategies that require significant increases in sales revenues in new areas and with new improved products. Finance and accounting managers must devise effective strategy

implementation approaches at low cost and minimum risk to that firm. R&D managers have to transfer complex technologies or develop new technologies to successfully implement strategies. 2.3. Strategy Evaluation The final phase of strategic management process is evaluation. Evaluation is the systematic documentation of the consequences of using the strategic planning process and the determination of its worth in order to make decisions. Evaluation provides input to future planning efforts for the organisation. Strategy evaluation includes three basic activities: (1) examining the underlying bases of a firms strategy, (2) comparing expected results with actual results, and (3) taking corrective actions to ensure that performance conforms to plans (David, 2007).

30

According to David (2007), strategy evaluation must meet several basic requirements to be effective. First, strategy evaluation activities must be economical; too much information can be just as bad as too little information. Strategy evaluation activities also shoud be meaningful; they should specifically relate to a firms objectives. Strategy evaluation activities should provide timely information; on occasion an in some areas, managers may daily need information. Strategy evaluation should be designed to provide a true picture of what is happening. There is no one ideal strategy evaluation system. The unique characteristics of an organisation, including its size, management style, purpose, problems, and strengths, can determine a strategy evaluation and control systems final design.

31

CHAPTER 3 STRATEGY ANALYSIS AND CHOICE

This chapter examines a comprehensive strategy-formulation framework that helps strategists generate feasible alternatives, evaluate those alternatives, and choose a specific course of action. This framework consists of three stages: (1) input stage, (2) matching stage, and (3) decision stage. 3.1. Comprehensive Strategy-Formulation Framework Techniques of strategy-formulation can be integrated into a decision
STAGE 1: THE INPUT STAGE External Factor Evaluation (EFE) Matrix Competitive Profile Matrix STAGE 2: THE MATCHING STAGE Internal Factor Evaluation (IFE) Matrix

ThreatsOpportunitiesWeaknesses(SWOT) Matrix

Strategic Position and Action Evaluation (SPACE) Matrix

Boston Internal-External Consulting (IE) Matrix Group (BCG) Matrix STAGE 3: THE DECISION STAGE

Gran Strategy Matrix

Quantitative Strategic Planning Matrix (QSPM)

making framework. This framework is composed of three stages as shown in Figure 3.1. Strategists can apply tools of the framework to all sizes and types of

32

organisations. Strategies can be identified, evaluated and selected by this framework.

Figure 3.1. Strategy-Formulation Framework (David, 2007)

Fred David stated the stages of the framework as below (David, 2007): Stage 1 of the formulation framework consists of the External Factor Evaluation (EFE) Matrix, the Internal Factor Evaluation (IFE) Matrix, and the Competitive Profile Matrix (CPM). Called the Input Stage, Stage 1 summirazes the basic input information needed to formulate strategies. Stage 2, called the Matching Stage, focuses upon generating feasible alternative strategies by aligning key external and internal factors. Stage 2 techniques include the Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix, the Strategic Position and Action Evaluation (SPACE) Matrix, the Boston Consulting Group (BCG) Matrix, the Internal-External (IE) Matrix, and the Grand Strategy Matrix. Stage 3, called the Decision Stage, involves a single technique, the Quantitative Strategic Planning Matrix (QSPM). A QSPM uses input information from Stage 1 to objectively evaluate feasible alternative strategies identified in Stage 2. A QSPM reveals the relative attractiveness of alternative strategies and thus provides objective basis for selecting specific strategies.

33

3.1.1. The Input Stage 1. External Factor Evaluation (EFE) Matrix External Factor Evaluation (EFE) Matrix allows strategists to summarize and evaluate economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive information. Illustrated in Table 3.1., the EFE Matrix can be developed in five steps: 1. List key external factors as identified in the external-audit process. Include a total of from ten to twenty factors, including both opportunities and threats affecting the firm and its industry. List the opportunities first and then the threats. Be as specific as possible, using percentages, ratios, and comparative numbers whenever possible. 2. Assign to each factor a weight that ranges from 0.0 (not important) to 1.0 (very important). The weight indicates the relative importance of that factor to being successful in the firm's industry. Opportunities often receive higher weights than threats, but threats too can receive high weights if they are especially severe or threatening. The sum of all weights assigned to the factors must be equal to 1.0. 3. Assign a 1-to-4 rating to each key external factor to indicate how effectively the firm's current strategies respond to the factor, where 4 = the response is superior, 3 = the response is above average, 2 = the response is average, and 1 = the response is poor. Ratings are thus company-based, whereas the weights in Step 2 are industry-based. 4. Multiply each factor's weight by its rating to determine a weighted score. 5. Sum the weighted scores for each variable to determine the total weighted score for the organisation.

In the EFE Matrix, the highest possible total weighted score for an organisation is 4.0 and the lowest possible total weighted score is 1.0. The average total weighted score is 2.5. A total weighted score of 4.0 indicates that

34

an

KEY EXTERNAL FACTORS

WEIGHT

RATING

WEIGHTED SCORE

Opportunities

12345Threats

12345Total organisation is responding in an outstanding way to existing opportunities and threats in its industry. A total score of 1.0 indicates that the firms strategies are not capitalizing on opportunities or avoiding external threats.

Table 3.1. External Factor Evaluation Matrix

35

2. Internal Factor Evaluation (IFE) Matrix Internal Factor Evaluation Matrix (IFE) summarizes and evaluates the major strengths and weaknesses in the functional areas of a business, and it also provides a basis for identifying and evaluating relationships among those areas. (Table David
KEY INTERNAL FACTORS
WEIGHT RATING WEIGHTED SCORE

3.2.)

(2007) stated IFE Matrix in five steps as below: 1. List key internal factors as identified in the internal-audit process. Use a total of from ten to twenty internal factors, including both strengths and weaknesses. List strengths first and then weaknesses. 2. Assign a weight that ranges from 0.0 (not important) to 1.0 (all-important) to each factor. The weight assigned to a given factor indicates the relative importance of the factor to being successful in the firm's industry. The sum of all weights must equal 1.0. 3. Assign a 1-to-4 rating to each factor to indicate whether that factor represents a major weakness (rating = 1), a minor weakness (rating = 2), a minor strength (rating = 3), or a major strength (rating = 4). Note that strengths must receive a 4 or 3 rating and weaknesses must receive a 1 or 2 rating. Ratings are thus company-based, whereas the weights in Step 2 are industry-based. 4. Multiply each factor's weight by its rating to determine a weighted score for each variable. 5. Sum the weighted scores for each variable to determine the total weighted score for the organisation.
Internal Strengths

12345Internal Weaknesses

1236

345Total

Table 3.2. Internal Factor Evaluation Matrix

In the IFE Matrix, the total weighted score can range from a low of 1.0 to a high of 4.0, with the average score being 2.5. Total weighted score well below 2.5 charactarize organisations that are weak internally, whereas scores above 2.5 indicate a strong internal position. Like the EFE Matrix, an IFE Matrix should include from 10 to 20 key factors. The number of factors has no effect upon the range of total weighted scores because the weights always sum to 1.0.

3. Competitive Profile Matrix (CPM) The Competitive Profile Matrix (CPM) identifies a firm's major competitors and their particular strengths and weaknesses in relation to a sample firm's strategic position. A CPM include both internal and external issues; therefore, the ratings 37

refer to strengths and weaknesses, where 4 = major strength, 3 = minor strength, 2 = minor weakness, and 1 = major weakness. A sample CPM is provided in Table 3.3. In this example critical success factors listed that include advertising, product quality, price competitiveness, management, financial position, customer loyalty, global expansion and market share.

Table 3.3. Competitive Profile Matrix

Different from EFE, critical success factors in a CPM are broader; they do not include specific or factual data and even may focus on internal issues. The

Company A
CRITICAL SUCCESS FACTORS Advertising Product Quality Price Competitiveness Management Financial Position Customer Loyalty Global Expansion Market Share TOTAL
WEIGHT RATING SCORE

Company B
RATING SCORE

Company C
RATING SCORE

critical success factors in a CPM also are not grouped into opportunities and threats as they are in an EFE. Ratings and total weighted scores can be compared with the sample firm in CPM. This provides internal strategic information which is important for the firm.

38

3.1.2. The Matching Stage 1. Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix The acronym SWOT stands for Strength, Weaknesses, Opportunities, and Threats. It is an approach to the analysis of the internal and external environments. This analytical technique assists an organisation to fulfill its needs for consistent knowledge of the current situation (David, 2007). SWOT analysis originated from efforts at Harvard Business School (HBS) to analyse case studies. In the early 1960s, classroom discussions in business schools were focusing on organisational strengths and weaknesses in relation to the opportunities and threats in their business environments (Panagiotou, 2003). SWOT analysis was first introduced in the 1980s for assesing General Electrics position in each of its various business. SWOT Matrix helps managers develop four types of strategies: SO (strengthsopportunities) Strategies, WO (weaknesses-opportunities) Strategies, ST

(stregths-threats) Strategies, and WT (weaknesses-threats) Strategies. In a SWOT Matrix (David, 2007). SO strategies use a firms internal strengths to take advantage of external opportunities. WO strategies aim at improving internal weaknesses by taking advantage of external external opportunities. ST

strategies use a firms strengths to avoid or reduce the impect of external

39

threats. WT strategies are defensive tactics directed at reducing internal weaknesses and avoiding environmental threats. As shown in Figure 3.2. SWOT Matrix is composed of nine cells. There are four key factor cells, four strategy cells, and one cell that is always left blank ( the upper-left cell). The four strategy cells, labeled SO, WO, ST,and WT, are developed after completing four key factor cells, S, W ,O, and T. There are eight steps involved in constructing a SWOT Matrix: 1. 2. 3. 4. 5. List the firm's key external opportunities. List the firm's key external threats. List the firm's key internal strengths. List the firm's key internal weaknesses. Match internal strengths with external opportunities and record the resultant SO Strategies in the appropriate cell. 6. Match internal weaknesses with external opportunities and record the resultant WO Strategies. 7. Match internal strengths with external threats and record the resultant ST Strategies. 8. Match internal weaknesses with external threats and record the resultant WT Strategies.

Always Leave Blank

STRENGTHS S 1. 2. 3. List strengths 4. 5.

WEAKNESSES W 1. 2. 3. List weaknesses 4. 5.

40

OPPORTUNITIES O 1. 2. 3. List opportunities 4. 5. THREATS T 1. 2. 3. List threats 4. 5.

SO STRATEGIES 1. 2. Use strengths to 3. take advantage 4. of opportunities 5. ST STRATEGIES 1. 2. Use strengths 3. to avoid 4. threats 5.

WO STRATEGIES 1. 2. Overcome weaknesses 3. by taking advantage 4. of opportunities 5. WT STRATEGIES 1. 2. 3. Minimize weaknesses 4. and avoid threats 5.

Figure 3.2. The SWOT Matrix

2. Strategic Position and Action Evaluation (SPACE) Matrix Strategic Position and Action Evaluation (SPACE) Matrix analysis is an analytical tool originally devised by Rowe and Mason (1994) and updated in subsequent editions. It uses the data and aggregates conclusions that would be produced by applying the classical strategic auditing models found in the strategy literature, such as the profit impact of marketing strategy, Porters (1979) competitive forces that determine industry profitability and the value

41

chain (Porter 1985), the Boston Consulting Group Matrix, and SWOT (Cross and Henderson, 2003). SPACE method is based on two internal dimensions and two external dimensions. The internal dimensions; financial strength [FS] and competitive advantage[CA], are the major determinants of the organisations strategic position, whereas the external dimensions of environmental stability[ES] and industry strength [IS] characterize the strategic position of the entire industry. (Radder and Louw, 1998). The key dimensions which determine environmental stability (ES) include technological change, rate of inflation, demand variability, price range of competing products, barriers to entry into the market, competitive pressure and price elasticity of demand. Factors determining industry strength (IS) include growth and profit potential, financial stability, technological know-how, resource utilization, capital intensity, ease of entry into the market and productivity or capacity utilization. Competitive advantage (CA) is of specific importance to marketers. Critical factors in this dimension are market share, product quality, product life cycles and product replacement cycles. Other variables include, customer loyalty, competitions capacity utilization, technological knowhow and vertical integration. Factors influencing financial strength (FS) include return on investment, leverage, liquidity, required/available capital, ease of exit from the market and the risk involved in business (Radder and Louw, 1998). 42

The steps required to develop a SPACE Matrix are as follows: 1. Select a set of variables to define financial strength (FS), competitive advantage (CA), environmental stability (ES), and industry strength (IS). 2. Assign a numerical value ranging from +1 (worst) to +6 (best) to each of the variables that make up the FS and IS dimensions. Assign a numerical value ranging from - 1 (best) to -6 (worst) to each of the variables that make up the ES and CA dimensions. 3. Compute an average score for FS, CA, IS, and ES by summing the values given to the variables of each dimension and dividing by the number of variables included in the respective dimension. 4. Plot the average scores for FS, IS, ES, and CA on the appropriate axis in the SPACE Matrix. 5. Add the two scores on the x-axis and plot the resultant point on X. Add the two scores on the y-axis and plot the resultant point on Y. Plot the intersection of the new xy point. 6. Draw a directional vector from the origin of the SPACE Matrix through the new intersection point. This vector reveals the type of strategies recommended for the organisation: aggressive, competitive, defensive, or conservative as shown in Figure 3.3.:

The aggressive strategy is typical in an attractive industry with stable economic conditions. Financial strength usually enables an organisation with this strategy to protect its competitive advantage. Such an organisation may also take full advantage of opportunities in its own or related industries, look for acquisition candidates, increase market share and/or allocate resources to products that have a definite competitive edge. Entry of new competitors is, however, a crucial factor. A competitive posture is characteristic of an attractive industry in a relatively unstable environment. The organisation with such a strategy is at a competitive 43

advantage and could acquire financial resources to increase marketing thrust, add to the sales force, and improve or extend the product line. Such an organisation could also invest in productivity, cut costs, or merge with a cashrich organisation. Financial strength is, however, of critical importance. The conservative posture is distinctive of a low growth but stable market. The focus is on financial stability, while product competitiveness is the critical factor. In this situation organisations could prune their product lines, cut costs, make cash flow improvements, protect competitive products, focus on new product developments, and try to enter into more attractive markets. A defining characteristic of the defensive posture is an unattractive industry where competitiveness is the critical factor. The organisation finding itself in this dimension often lacks a competitive product and financial strength. It could prepare for retreat from the market, discontinue marginally profitable products, reduce costs and capacity, and defer or minimize investments (Radder and Louw, 1998).

44

Figure 3.3. Strategic Position and Action Evaluation Matrix 3. Boston Consulting Group (BCG) Matrix Boston Consulting Group (BCG) Matrix or the growth-share matrix is a chart that was created by Bruce Henderson for the Boston Consulting Group in 1970 to help corporations with analyzing their business units or product lines. This helps the company allocate resources and is used as an analytical tool in strategic management and portfolio-analysis. In this model, the first step is to identify the various Strategic Business Units ("SBU's") in a company portfolio. An SBU is a unit of the company that has a

45

separate mission and objectives and that can be planned independently from the other businesses. An SBU can be a company division, a product line or even individual brands - it all depends on how the company is organised. Using the BCG Box a company classifies all its SBU's according to two dimensions: relative market share and industry growth rate. Relative market share position is defined as the ratio of a division's own market share in a particular industry to the market share held by the largest rival firm in that industry. Relative market share position is given on the x-axis of the BCG Matrix. The midpoint on the x-axis usually is set at .50, corresponding to a division that has half the market share of the leading firm in the industry. The y-axis represents the industry growth rate in sales, measured in percentage terms. The growth rate percentages on the y-axis could range from -20 to +20 percent, with 0.0 being the midpoint. These numerical ranges on the x- and y- axes are often used, but other numerical values could be established as deemed appropriate for particular organisations (David, 2007). As shown in Figure 3.4., each circle represents a separate division. The size of the circle corresponds to the proportion of corporate revenue generated by that business unit, and the pie slice indicates the proportion of corporate profits generated by that division. Divisions located in Quadrant I of the BCG Matrix are called Question Marks, those located in Quadrant II are called Stars, those

46

located in Quadrant III are called Cash Cows, and those divisions located in Quadrant IV are called Dogs.

RELATIVE MARKET SHARE POSITION

High
1.0 I N D U S T R Y G R O W T H R A T E (%)

Medium 0.50

Low 0.0

High +20
QUESTION MARKS

STARS

II

S A L E

Medim
0

CASH COWS

DOGS

III

IV

Low -20

Figure 3.4. Boston Consulting Group Matrix

The four Quadrants indicate different types of businesses: 1. Question Marks: Businesses operating in high-growth markets but having low relative market shares are put in question marks cell. Most of the SBUs start off as question marks as the company tries to enter a high-growth market in which there is a market leader already. In this cell, a company has to put in a lot of cash in plants, equipment,

47

and personnel to keep with the fast growing market to overtake the leader. The company has to think hard about whether to keep pouring money into this business since the risk involved is quite high. 2. Stars: A successful question mark SBU becomes a star, a market leader in a high-growth market. Here, again, a company needs to put in a lot of cash to keep up with the high market growth rate and fight with competitors. Thus, a star may produce a negative cash flow at present but in future it has to produce a positive cash flow. The risk involved in investment in this cell is medium to low. 3. Cash Cows: A star with the largest relative market share becomes a cash cow, when the markets annual growth rate falls below 10%. This produces the maximum positive cash for the company. Capacity expansion is not financed in this cell as the markets growth rate has slowed down. An SBU in this cell, being the market leader, provides positive cash flows with economies of scale and higher profit margins. Cash cows are used to pay the bills and support the SBUs in other quadrants. In case the cash cow starts losing relative market share, it will need money in order to maintain market leadership or it will go to dogs. 4. Dogs: SBUs with weak market shares in low growth markets are called dogs. These may generate some cash but generally give low

48

profits or losses. The company may hold a dog expecting a turnaround in the market or in the SBU (to become a market leader again) or for sentimental reasons but normally dog SBUs are closed (Singh, 2004). Stars and cash cows are favorable quadrants, while there shall not be too many question marks or dogs. A balance among these has to be obtained. Successful SBUs have a life cycle. Starting as question marks, they become stars, then cash cows, and dogs at the end. 4. Internal-External (IE) Matrix The Internal-External (IE) Matrix positions an organisation's various divisions in a nine cell display illustrated in Figure 3.5. The IE Matrix involve plotting organisation divisions in a schematic diagram. Also, the size of each circle represents the percentage sales contribution of each division, and pie slices reveal the percentage profit contribution of each division in IE Matrix. The IE Matrix is based on two key dimensions: the IFE total weighted scores on the x-axis and the EFE total weighted scores on the y-axis. On the x-axis of the IE Matrix, an IFE total weighted score of 1.0 to 1.99 represents a weak internal position; a score of 2.0 to 2.99 is considered average; and a score of 3.0 to 4.0 is strong. Similarly, on the y-axis, an EFE total weighted score of 1.0 to 1.99 is considered low; a score of 2.0 to 2.99 is medium; and a score of 3.0 to 4.0 is high. 49

The IE Matrix can be divided into three major regions that have different strategy implications. First, the prescription for divisions that fall into cells- I, II, or IV can be described as grow and build. Intensive (market penetration, market

development, and product development) or integrative (backward integration, forward integration, and horizontal integration) strategies can be most appropriate for these divisions. Second, divisions that fall into cells III, V, or VII can be managed best with hold and maintain strategies; market penetration and product development are two commonly employed strategies for these types of divisions. Third, a common prescription for divisions that fall into cells VI, VIII, or IX is harvest or divert. Successful organisations are able to achieve a portfolio of businesses positioned in or around cell I in the IE Matrix (David, 2007).

50

5. Grand Strategy Matrix The Grand Strategy Matrix is based on two evaluative dimensions: competitive position and market growth. Appropriate strategies for an organisation to consider are listed in sequential order of attractiveness in each quadrant of the matrix.(Figure 3.6). Firms located in Quadrant I of the Grand Strategy Matrix are in an excellent strategic position. For these firms, continued concentration on current markets (market penetration and market development) and products (product

development) are appropriate strategies. It is unwise for a Quadrant I firm to shift notably from its established competitive advantages. When a Quadrant I organisation has excessive resources, then backward, forward, or horizontal integration may be effective strategies. When a Quadrant I firm is too heavily committed to a single product, then concentric diversification may reduce the risks associated with a narrow Product line.

51

Firms positioned in Quadrant II need to evaluate their present approach to the marketplace seriously. Although their industry is growing, they are unable to compete effectively, and they need to determine why the firm's current

approach is ineffectual and how the company can best change to improve its competitiveness. Because Quadrant II firms are in a rapid-market-growth industry, an intensive strategy is usually the first option that should be or

considered. However, if the firm is lacking a distinctive competence

competitive advantage, then horizontal integration is often a desirable alternative. As a last resort, divestiture or liquidation should be considered.

Quadrant III organisations compete in slow-growth industries and have weak

competitive positions. These firms must make some drastic changes quickly to avoid further demise and possible liquidation. Extensive cost and retrenchment should be pursued first. An alternative strategy is to shift resources away from the current business into different areas. If all else fails, the final options for Quadrant III businesses are divestiture or liquidation. Finally, Quadrant IV businesses have a strong competitive position but are in a slow growth industry. These firms have the strength to launch diversified programs into more promising growth areas. Quadrant IV firms have

characteristically high cash flow levels and limited internal growth needs and often can pursue concentric, horizontal, or conglomerate diversification

successfully. Quadrant IV firms also may pursue joint ventures (David, 2007). 52

Figure 3.6. Grand Strategy Matrix

RAPID MARKET GROWTH Quadrant II 1. Market development 2. Market penetration 3. Product development 4. Horizontal integration 5. Divestiture 6. Liquidation WEAK COMPETITIVE POSITION Quadrant III 1. Retrenchment 2. Concentric diversification 3. Horizontal diversification 4. Conglomerate diversification 5. Divestiture 6. Liquidation SLOW MARKET GROWTH Quadrant IV 1. Concentric diversification 2. Horizontal diversification 3. Conglomerate diversification 4. Joint Venture Quadrant I 1. Market development 2. Market penetration 3. Product development 4. Forward integration 5. Backward integration 6. Horizontal integration 7. Concentric diversification STRONG COMPETITIVE POSITION

3.1.3. The Decision Stage 1. The Quantitative Strategic Planning Matrix (QSPM)

53

According to David (1986) The Quantitative Strategic Planning Matrix is a technique that allows top managers to aveluate alternative strategies objectively based on a firms internal strengths/weaknesses and external

opportunities/threats. Other than ranking strategies to achieve the prioritized list, there is only one analytical technique in the literature designed to determine the relative attractiveness of feasible alternative actions. This technique is the Quantitative Strategic Planning Matrix (QSPM), which comprises Stage 3 of the

strategy-formulation analytical framework. This technique objectively indicates which alternative strategies are best. The QSPM uses input from Stage' I "analyses and matching results from Stage 2 analyses to decide objectively among alternative strategies. That is, the EFE Matrix, IFE Matrix, and Competitive Profile Matrix that make up Stage 1, coupled with the SWOT Matrix, SPACE Analysis, BCG Matrix, IE Matrix, and Grand Strategy Matrix that make up Stage 2, provide the needed information for setting up the QSPM (Stage 3). The QSPM is a tool that allows strategists to evaluate alternative strategies objectively, based on previously identified external and internal critical success factors. The basic format of the QSPM is illustrated in Table 3.4. Note that the left column of a QSPM consists of key external and internal factors (from Stage 1), and the top row consists of feasible alternative strategies, (from Stage 2). 54

Specifically, the left column of a QSPM includes information obtained directly from the EFE Matrix and IFE Matrix. In a column adjacent to the critical success factors, the respective weights received by each factor in the EFE Matrix and the IFE Matrix are recorded. The top row of a QSPM consists of alternative strategies derived from the SWOT Matrix, SPACE Matrix, BCG Matrix, IE Matrix, and Grand Strategy Matrix. These matching tools usually generate similar feasible alternatives. Conceptually, the QSPM determines the relative attractiveness of various strategies based on the extent to which key external and internal critical success factors are capitalized upon or improved. As shown in Table 3.4., the relative attractiveness of each strategy within a set of alternatives is computed by determining the cumulative impact of each external and internal critical success factor. Any number of sets of alternative strategies can be included in the QSPM, and any number of strategies can make up a given set, but only strategies within a given set are evaluated relative to each other. There are six steps required to develop a QSPM (David, 2007): Step 1: Make a list of the firm's key external opportunities/threats and internal strengths/weaknesses in the left column of the QSPM. This information should be taken directly from the EFE Matrix and IFE Matrix. A minimum of 10 external critical success factors and 10 internal critical success factors should be included in the QSPM. Step 2: Assign weights to each key external and internal factor. These weights are identical to those in the EFE Matrix and the IFE Matrix. The weights are presented in a straight column just to the right of the external and internal critical success factors. 55

Step 3: Examine the Stage 2 (matching) matrices and identify alternative strategies that the organisation should consider implementing. Record these strategies in the top row of the QSPM. Group the strategies into mutually exclusive sets if possible. Step 4: Determine the Attractiveness Scores (AS), defined as numerical values that indicate the relative attractiveness of each strategy in a given set of alternatives. Attractiveness Scores are determined by examining each key external or internal factor, one at a time, and asking the question, "Does this factor affect the choice of strategies being made?" If the answer to this question is yes, then the strategies should be compared relative to that key factor. Specifically, Attractiveness Scores should be assigned to each strategy to indicate the relative attractiveness of one strategy over others, considering the particular factor. The range for Attractiveness Scores is 1 = not attractive, 2 = somewhat attractive, 3 = reasonably attractive, and 4 = highly attractive. If the answer to the above question is no, indicating that the respective key factor has no effect upon the specific choice being made, then do not assign Attractiveness Scores to the strategies in that set. Use a dash to indicate that the key factor does not affect the choice being made. if one strategy receives a dash, then all others must receive a dash in a given row. Step 5: Compute the Total Attractiveness Scores. Total Attractiveness Scores are defined as the product of multiplying the weights (Step 2) by the Attractiveness Scores (Step 4) in each row. The Total Attractiveness Scores indicate the relative attractiveness of each alternative strategy, considering only the impact of the adjacent external or internal critical success factor. The higher the Total Attractiveness Score, the more attractive the strategic alternative (considering only the adjacent critical success factor). Step 6: Compute the Sum Total Attractiveness Score. Add Total Attractiveness Scores in each strategy column of the QSPM. The Sum Total Attractiveness Scores reveal which strategy is most attractive in each set of alternatives. Higher scores indicate more attractive strategies, considering all the relevant external and internal factors that could affect the strategic decisions. The magnitude of the difference between the Sum Total Attractiveness Scores in a given set of strategic alternatives indicates the relative desirability of one strategy over another.

56

Key Factors Key External Factors Economy Political/Legal/Governmental Social/Cultural/Demographic/Environmental Technological Competitive Key Internal Factors Management Marketing Finance/Accounting Production/Operations Research and Development Computer Information Systems Sum Total Attractiveness Score

Weight

STRATEGIC ALTERNATIVES Strategy 1 Strategy 2 Strategy 3 AS TAS AS TAS AS TAS

Table 3.4. The Quantitative Strategic Planning Matrix

PART II: PRACTICE

CHAPTER 4

57

THE DESCRIPTION OF THE TURKISH AIRLINES ON DOMESTIC AIR TRANSPORTATION OPERATIONS

This chapter deals with the history of Turkish Airlines, chief characteristics of Turkish Airlines, and the Turkish Aviation Industry. 4.1. The History of Turkish Airlines The Turkish Airlines (TA) was established in May, 1933, as the State Airlines Administration - Hava Yollar Devlet Iletmesi Idaresi. It began its operations with an Istanbul, Eskiehir, Ankara service in August, 1933. The name was changed to Devlet Hava Yollar Umum Mdrl (DHY) in 1938. The first longawaited inaugural international flight was launched in 1947 to Athens but it was another 40 years before the introduction of long-haul flights to the Far East and across the Atlantic. In a major reorganisation the state company DHY was replaced with a mixed corporation, Turkish Airlines Company in 1956. The airline's shares were passed to the Prime Ministry Public Participation Administration in 1990, which took the company public first in December 1990 selling 5 percent of the shares. The government later sold about 23.0 percent of the shares to the public in December 2004 and a further 28.75 percent in May 2006. The airline is owned by the Turkish Republic Privatisation Administration (49 percent) and private shareholders. The Turkish Airlines quit Qualiflyer group in 1999, due to 58

incompatibilites with Swissair and Delta. The request of joining the Star Alliance has been accepted in December 2006. 4.2. Chief Characteristics of Turkish Airlines on Domestic Air Transportation Operations This section describes, Turkish Airlines passenger function, Turkish Cargo function, its mission statement, its organisational structure, its fleet, its destinations on domestic flights, its maintenance centre, its e-commerce operations, its domestic accidents, and its financial condition in 2005-2006. 4.2.1. The Turkish Airlines Passenger Function Turkish Airlines (TA) is the flag carrier of Turkey based in Istanbul. It operates a network of scheduled services to 103 international and 29 domestic cities, serving a total of 132 airports, in Europe, Asia, Africa, and the United States. The airline's main base is Atatrk International Airport (IST), Istanbul, with secondary hubs at Esenboga International Airport (ESB), Ankara, and Sabiha Gokcen International Airport (SAW), Istanbul. In 2006, it carried 17 million passengers with total revenues of US$3 billion. The airline has around 12,000 employees. 4.2.2. The Turkish Cargo Function The Turkish Airlines offers a variety of services designed to meet customers shipping needs and to fulfill their individual transport requirements. The Turkish 59

Airlines transports every type of cargo ranging from small packages to livestock, perishable foods, textile products, flowers, leather and spare parts. Currently on domestic flights the Turkish Cargo service is provided with passenger planes to 28 destinations, 5 of which have Turkish Cargo organisations locally. The Turkish Airlines got 8 percent of the total income from cargo and mail transportation in 2006. In the period of 2006, TA has transported 159,873 tones of cargo, which is 10 percent higher than 2005 figure, additionally, the revenue gathered from cargo has increased 14 percent. Destination points of the Turkish Cargo on domestic flights are Adana, Ankara, Antalya, Istanbul, Izmir (airports with Customs) Agri, Adiyaman, Batman, Bodrum, Dalaman, Denizli, Diyarbakir, Elazig, Erzincan, Erzurum, Gaziantep, Kahramanmaras, Kars, Kayseri, Konya, Malatya, Mardin, Mus, Samsun, Sanliurfa, Sivas, Trabzon and Van.

4.2.3. Mission Statement As Turkeys flag-carrier, the mission of the Turkish Airlines is to provide air transportation services within the context of the following objectives:
Strengthening the Companys position as a global airline carrier by

expanding its long-distance flight network.

60

 Positioning

the Company as a technical service provider by transforming its maintenance unit into a leading maintenance base in the region.

Promoting the Companys identity as a service provider in all areas

of strategic civil aviation, including handling and flight training.

Maintaining Providing

the Companys leading position in domestic air transportation.

non-stop, high-quality air transportation services by collaborating with a global airline alliance that complements its network to further improve the Companys image abroad and increase marketing opportunities.

Making Istanbul an important hub.

4.2.4. Organisational Structure Turkish Airlines is organized by major business function as shown in Figure 4.1.

61

Figure 4.1. Turkish Airlines Organisation Chart 4.2.5. Fleet The fleet in 2006 comprises 102 passenger and one cargo planes, a total number of 103 planes. Seat capacity reached 17.931. Figure 4.2. shows the categorisation of the planes in Turkish Airlines.

62

A340-300 Number of planes: 7 Passenger capacity: 271

A330-203 Number of planes: 5 Passenger capacity: 250

A310-300 Number of planes: 6 Passenger capacity: 210

A321 Number of planes: 9 Passenger capacity: 195

A320 Number of planes: 15 Passenger capacity: 150

A319 Number of planes: 2 Passenger capacity: 124

B737-800 Number of planes: 41 Passenger capacity: 165

B737-400 Number of planes: 17 Passenger capacity: 150

A310-304 Number of planes: 1 Cargo Capacity: 36.00km/200m3 Figure 4.2.Turkish Airlines Fleet

63

4.2.6. Destinations of Turkish Airlines on Domestic Flights The Turkish Airlines operates the following services in domestic scheduled destinations as shown in Figure xxx: Adana (akirpaa Airport), Adyaman (Adyaman Airport), Ar (Ar Airport), Ankara (Esenboa International Airport), Antalya (Antalya International Airport), Bodrum (Milas-Bodrum Airport), Bursa (Yeniehir Airport), Dalaman (Dalaman Airport), Denizli (ardak Airport), Diyarbakr (Diyarbakr Airport), Elaz (Elaz Airport), Erzincan (Erzincan Airport), Erzurum (Erzurum Airport), Eskisehir (Anadolu Airport), Gaziantep (Ouzeli Airport), Istanbul (Atatrk International Airport-Sabiha Gken

International Airport), zmir (Adnan Menderes International Airport), Kars (Kars Airport), Kayseri (Erkilet Airport), Konya (Konya Airport), Malatya (Erha Airport), Mardin (Mardin Airport), Mu (Mu Airport), Nevsehir (Kapadokya Airport), Samsun (aramba Airport), anlurfa (anlurfa Airport), Sivas (Sivas Airport), Trabzon (Trabzon Airport), Van (Ferit Melen Airport).

Figure 4.3. Destinations of TA on Domestic Flights

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4.2.7. Maintenance Centre Turkish Airlines has a maintenance centre at its hub Atatrk International Airport, (IST) in Istanbul. The Turkish Airlines Maintenance Centre (TA Technic) is responsible for the maintenance, repair and overhaul of TA's all aircrafts, engines, and components. This centre also serves to Onur, Pegasus, and Atlasjet planes. 4.2.8. E-commerce On the Turkish Airlines web site, static pages, where provision of information is crucial, are updated continuously. All information on departures-arrivals, baggage tracking, cargo tracking, Miles&Smiles transactions and scheduled queries are within the scope of the on-line services available. 4.2.9. Accidents During its 74 year history, the Turkish Airlines had three accidents on its international flights, and eighteen on domestic flights. The most disastrous was Turkish Airlines Flight 981, which crashed near Paris in France on 3 March 1974 due to explosive decompression, killing all 346 people on board. The main cause of this event was a design fault on the cargo doors of DC-10 aircraft.

65

4.2.10. Financial Condition The Turkish Airlines gain income from the following three ways; (1) income of passenger transportation, (2) income of cargo and mail and (3) other incomes like technical care service, charter, and hiring. In 2006, the Turkish Airlines got 80 percent of its total income from passenger transportation, 8 percent of the total income from cargo and mail transportation. The total income of the Turkish Airlines in 2006 was 3.8 billion dollars. Table 4.1., 4.2., and 4.3. give the balance sheet and income statement of Turkish Airlines in 2005 and 2006.

66

ASSETS Current Assets Cash and Cash Equivalents Marketable Securities (net) Accounts Receivable (net) Financial Lease Receivables (net) Due from Related Parties (net) Other Receivables (net) Biological Assets (net) Inventories (net) Receivables from Construction Contracts in Progress (net) Deferred Tax Assets Other Current Assets Non-Current Assets Accounts Receivable (net) Financial Lease Receivables (net) Due from Related Parties (net) Other Receivables (net) Financial Assets (net) Positive/Negative Goodwill (net) Investment Property Tangible Fixed Assets (net) Intangible Fixed Assets (net) Deferred Tax Assets Other Non-Current Assets Total Assets

Audited 31 December 2006 857.257.447 365.057.959 273.400.852 21.318.613 8.571.133 135.643.567 53.265.323 3.741.767.286 14.812.000 1.971.731 29.327.501 3.503.076.666 7.508.620 158.971.576 26.099.192 4.599.024.733

Audited 31 December 2005 825.922.684 482.910.555 191.596.806 970.701 6.567.690 84.255.279 59.621.653 2.987.438.785 1.901.488 37.406.378 2.631.113.979 6.154.133 298.568.802 12.294.005 3.813.361.469

Table 4.1. Turkish Airlines Balance Sheets as at 31 December 2006 and 2005 (All amounts expressed in New Turkish Lira (YTL) unless otherwise stated.)

67

LIABILITIES Short-Term Liabilities Bank Borrowings (net) Short-Term Portion of Long-Term Bank Borrowings (net) Financial Lease Obligations (net) Other Financial Liabilities (net) Accounts Payable (net) Due to Related Parties (net) Advances Received Billings on Construction Contracts in Progress (net) Provisions for Liabilities Deferred Tax Liabilities Other Liabilities (net) Long-Term Liabilities Bank Borrowings (net) Financial Lease Obligations (net) Other Financial Liabilities (net) Accounts Payable (net) Due to Related Parties (net) Advances Received Provisions for Liabilities Deferred Tax Liabilities Other Liabilities (net) MINORITY INTERESTS SHAREHOLDERS' EQUITY Share Capital Capital Reserves - Share Premium - Share Premium of Cancelled Shares - Revaluation Surplus on Tangible Fixed Assets - Revaluation Increments on Financial Assets - Restatement Effect on Shareholders' Equity Profit Reserves - Legal Reserves - Statutory Reserves - Extraordinary Reserves - Special Funds - Associate Shares and Gain on Sale of Investment Property to be added to Capital - Foreign Currency Translation Differences Net Profit for the Year Accumulated Profits/(Losses) Total Liabilities and Shareholders' Equity

Audited 31 December 2006 1.073.727.696 4.481.158 218.720.799 373.497 318.114.700 14.869.046 45.665.631 27.369.058 444.133.807 1.915.578.585 36.401.442 1.443.932.862 8.988.621 117.304.910 308.950.750 1.609.718.452 175.000.000 1.922.017.534 181.185 49.179.160 1.872.657.189 8.223.909 417.011 7.806.889 9 185.749.426 (681.272.417) 4.599.024.733

Audited 31 December 2005 1.198.903.059 362.903.225 179.092.821 332.636 255.994.916 8.022.859 52.397.414 27.543.644 312.615.544 1.366.116.817 856.730.859 7.124.267 113.641.242 388.620.449 1.248.341.593 175.000.000 1.872.838.374 181.185 1.872.657.189 8.223.909 417.011 7.806.889 9 138.227.837 (945.948.527) 3.813.361.469

Table 4.2. Turkish Airlines Balance Sheets as at 31 December 2006 and 2005 (All amounts expressed in New Turkish Lira (YTL) unless otherwise stated.)

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MAIN OPERATING REVENUES Sales Revenues (net) Cost of Sales (-) Service Revenues (net) Other Revenues from Main Operations/Interest+Dividend+Rent (net) GROSS OPERATING PROFIT Operating Expenses (-) NET OPERATING PROFIT Income from Other Operations Losses from Other Operations (-) Financial Expenses (-) OPERATING PROFIT Net Monetary Gain/(Loss) (net) MINORITY INTEREST PROFIT BEFORE TAXATION Taxes NET PROFIT FOR THE YEAR EARNINGS PER SHARE (YKr)

Audited 1 January 31 December 2006 3.813.810.220 (3.247.648.431) 235.572.545 801.734.334 (712.312.403) 89.421.931 875.813.548 (671.072.706) (98.102.328) 196.060.445 196.060.445 (10.311.019) 185.749.426 0,106

Audited 1 January 31 December 2005 2.956.104.996 (2.435.869.117) 150.966.612 671.202.491 (577.630.482) 93.572.009 425.430.333 (277.165.588) (60.042.012) 181.794.742 181.794.742 (43.566.905) 138.227.837 0,079

Table 4.3. Turkish Airlines Statements of Income for the Years Ended 31 December 2006 and 2005 (All amounts expressed in New Turkish Lira (YTL)
unless otherwise stated.)

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4.3. The Turkish Aviation Industry This section examines the nature of the Turkish Aviation Industry, the fuel prices in the aviation industry, and the competition in the Turkish Domestic Air Transportation 4.3.1. The Nature of The Turkish Aviation Industry Although the Turkish aviation sector is effected negatively by the political and financial crisis, it continues its growth in the long term with the growth of economy, liberalisation, globalisation, international trade developing, lowering prices, and expanding service net. This sectors climactic was the terrorist attack in 11 September 2001 in USA. The aviation sector was harmed due to this attack, that gave rise to the bankruptcy of some prominent airline companies. While the aviation sector was trying to recover itself, it was damaged again. This time the reasons were Gulf War and SARS illness in the Far East Asia in 2003. But, Iraq war was shorter than expected and SARS was taken under control, so aviation sector got into growing trend in 2004. The high performance of the Turkish economy in recent years, the rising numbers of tourists coming to Turkey, the lower prices of the private airways firms after the tax cut on flight prices in 2004 speeded up the Turkish airways transportation to sector. Though the domestic passenger number was 8,7

70

million in 2002, it rose up to nearly 20 million domestic passengers in 2005. This number is 38 percent more than the number in 2004. By 2006, March, the Turkish aviation sector had 204 passenger planes, 24 cargo planes and capacity of 38 thousand passengers. Although Turkish Airlines had domestic flights from two airports to 25 scheduled domestic points in 2003, the flights today are from seven airports by five airway firms to 38 points. If we bear in mind the Turkeys advantageous geographical condition, interregional trade development, and the improvement efforts in tourism, the Turkish aviation sector which has a growing trend now is expected to continue this growing process. Furthermore, cargo transportation has a great deal of improvements. There were 74 percent increase in domestic cargo flights in 2002-2005. Totally 27.182 tons of cargo capacity was reached by September 2006. Turkey acts like a point of passing between Europe, Middle East and Asia because of its geographical condition. The improvements in recent years, Turkeys liberal policies and bilateral agreements have turned this geographical area to a special centre for passenger and cargo transportation. There are 70 airports can be opened to air traffic in Turkey. East part of Turkey has many airports but some of them are not in use because of the topographic structure of those regions. In a short time, the demand increasing

71

of air transportation will affect these unused airports to provide important advantages for Turkey. 4.3.2. The Fuel Prices in the Aviation Industry The most important reason of preferring air transportation to others is ticket prices. Fuel cost acts really an important role to determine ticket prices. Rising of fuel prices affects air transportation negatively. The fuel price in Turkey is higher than fuel price in other countries because of tax change, so this hinders lowering the flight price and results in minimizing the competitive power of the Turkish air transportation firms. 4.3.3. The Competition in the Turkish Domestic Air Transportation Regional Aviation may be Turkeys the most important decision on in 21th century by the word Every Turk will try plane at least once. In relation with the incentive policy to make the domestic flights attractive and to bring activity to regional airports there has been a reduction in DHMI (Government Airport Service) tariffs, the private communication tax and the education contribution pay have been abolished by the Ministry of Transport in October, 2003. Private air transporter companies gain the right to have flights in domestic flights according to the decision taken by Ministry of Transport. With this practice

many new private air transporter company have enter to the market, therefore a sudden shift up and a real competition have developed in the sector. This

72

increased the number of domestic passengers.(Table xxx). Private firms increased domestic flights by taking their licenses. Onur Air, Atlas Jet and

Pegasus Airlines are initial firms that took the licenses.

Rank 1 2 3 4

Companies Turkish Airlines Onur Air Atlas Jet Pegasus

Passenger 8.857.000 4.400.267 2.982.712 1.818.989

Table 4.4. Number of Domestic Passenger Carried in 2006 Onur Air is a low-cost airline based in stanbul, Turkey. As well as operating package flights between Turkey and a number of Westrn European Countries, it also operates a no-frills scheduled service between stanbul and 12 other Turkish cities, using a flat fare structure. Its main base is Atatrk International Airport, stanbul. The airliner was established in 1992 and started its operations in May 1992. It began with two leased Airbus A320 aircrafts. In 2003, it launched its low-fare domestic services. It carries 1.4 million passengers a year by average. It is owned by Cankut Bagona (33.3%), the Chairman and the Chief Executive, Hayri Ili (33.3%) and Unsal Tulbentci (33.3%). Onur Air average fleet age is 11.8 years old in July 2006. Pegasus Airlines is an airline based in Istanbul, Turkey. It operates holiday charter flights to the Turkish resorts from North and West Europe, and leases

73

aircraft and crew to other operators on demand. Its main base is Sabiha Gken International Airport (SAW), Istanbul, with a second hub at Antalya International Airport (AYT). The airline was established in December, 1989 and started operations in April, 1990. It was owned by Aer Lingus, but was sold in 1994 to Yapi Kredi Bank. It is now owned by Esas Holdings (85 percent) and Silkar (15 percent). Pegasus Airlines is one of the biggest charter companies in Turkey with a passenger capacity of more than 4 million passengers per year. Atlasjet is an airline based in Istanbul, Turkey. It operates domestic scheduled passenger services and regular charter flights to Europe, Kazakhstan and the United Arab Emirates. It serves to Germany on behalf of ger Tours. Its main base is Atatrk International Airport, Istanbul, with hubs at Adnan Menderes Airport, zmir and Antalya Airport. The airline was established on 14 March 2001 and started operations in June, 2001. Formerly known as Atlasjet International Airlines, it was set up as a subsidiary of ger Holdings. In 2004, ETS Group acquired a 45 percent stake, increased in February 2006 to 90 percent when it acquired ger's 45 percent holding. It is now owned by ETS Group (90 percent) and Tuncay Doganer (Vice-President and Chief

Executive)(10 percent) and has 730 employees.

CHAPTER 5
74

THE APPLICATION OF THE STRATEGY FORMULATION FRAMEWORK TO THE TURKISH AIRLINES ON DOMESTIC AIR TRANSPORTATION
This chapter aims to apply strategy formulation analytical framework to the Turkish Airlines on Domestic Air Transportation. This framework has three stages: (1) input stage, (2) matching stage, (3) decision stage. Stage 1 of the formulation framework consists of the External Factor Evaluation (EFE) Matrix, the Internal Factor Evaluation (IFE) Matrix, and the Competitive Profile Matrix (CPM). Stage 2, called the Matching Stage, include the Strengths-WeaknessesOpportunities-Threats (SWOT) Matrix, the Strategic Position and Action Evaluation (SPACE) Matrix, the Boston Consulting Group (BCG) Matrix, the Internal-External (IE) Matrix, and the Grand Strategy Matrix. Stage 3, comprises a single technique, the Quantitative Strategic Planning Matrix (QSPM).

5.1. The Input Stage 75

 External Factor Evaluation (EFE) Matrix Table 5.1. EFE Matrix for the Turkish Airlines on Domestic Air
KEY EXTERNAL FACTORS Opportunities 1. The portion of air transpoortation in total transportation is very low with respect to land or maritime transportation. The Turkish domestic air transportation market is 20 percent less than that of European counterparts. 2. The low passanger loadings and low marketing and distribution expenses are some of the important opportunities that TA holds. It is anticipated that TA will increase its present 69 percent passanger loading percentage to 71 percent in 2007, and to 73 percent in 2010. 3. Due to the direct relation and interaction among the industries of tourism and transportation, the opportunity of integrating touristic activities and domestic air network which is developed in recent years has arised. 4. In addition to the tax reductions in ticket fees, the grant providing the freedom of self pricing for airway companies resulted in the opportunity of offering lower prices for the corresponding firms. 5. Though not all of them are operating, the existence of many airports in the Eastern part of the country which has inconvenient topographic structure provides the advantages of responding the rapid demand for air transportation, and widening the network in national scales. 6.Through the EU integration process the adoption of EU standards concerning aviation security and safety in Turkish Aviation will be provided. Hence, the security will be increased and the robust development of Turkish Aviation will be provided. 7. The domestic passanger density in January 2006 has grown 385 percent compared to January, 2005. Threats 1. There are five firms except TA operating in the industry. It is expected that the new firms will enter to the industry and that will increase competition, which is highly competitive presently in the industry. 2.The rapid and unplanned growth in the industry increased the vacant positions for licensed staff needed, and training institutions could not respond vacancies resulting from this rapid growth. 3.The rise of fuel prices in the world and the the excess taxes on the fuel prices in Turkey: the fuel costs are very essential in pricing process of the tickets. The recent increases in fuel prices all over the world has negative effects on air transportation. 4. Turkey have borders to Middle East countries, the bottle and political turmoil in this region and the uncertainty in geopolitics will negatively affect the Turkish aviation which is operating so close to the corresponding region, consequently can be a barrier to the development of tourism and air transportation. 5. In order to survive, the low scale aviation companies added small sized aircrafts to their fleets. Additionally, for the sake of lower prices, different flight alternatives for different levels of economic conditions that passangers have, have been presented. A lot of new flight routes from different cities to Istanbul including Antalya, Izmir, Ankara, and Erzurum has been started. Total 0.12 0.06 0.09 2 4 2 0.24 0.24 0.18
WEIGHT RATING
WEIGHTED SCORE

0.12

0.36

0.06

0.18

0.10 0.07 0.08

4 2 2

0.40 0.14 0.16

0.04 0.12

3 2

0.12 0.24

0.07

0.07

0.07 1

0.14 2.47

Transportation The overall EFE rating for TA is 2.47. This signifies that TA is managing these threats and opportunities just below the 2.5 average. Since there are some serious threats, TA could try to address these issues in a more efficient and effective manner. A company that finds itself in such a situation should attempt

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to more effectively counteract threats with opportunities. This will reduce the impact of external threats on the company.

Internal Factor Evaluation (IFE) Matrix

KEY INTERNAL FACTORS Strengths 1.In 2006, TA has won second standing in one of the AEA service quality evaluation criteria concerning proportion of on time departures in total departures, via achieving a proportion of 83,9 percent. 2. TA is qualified to take the worlds # 1 certificate called as IOSA, concerning airport security management and given by IATA. 3. In December 2006, TA has decided to join to the biggest global airline alliance named as Star Alliance. 4. All of TA domestic offices and agents passed to the e-ticket system. 5. TA transported 8.9 million passangers in domestic filights, in 2006, which is 23.8 percent higher than previous year. 6. Through the period between January and December 2006, parallel to the growth in fleet; TA increased its staff by 37.3 percent. 7. In the period of 2006, TA has transported 159,873 tones of cargo, which is 10 percent higher than 2005 figure, additionally, the revenue gathered from cargo has increased 14 percent. 8. In June 2006, TA qualified for ISO 9001:2000 Quality Certificate. 9. With the inclusion of 25 new generation planes, the average age of planes in the fleet decreased to 7,3 years, and the number of planes rose by 24.4 percent and reached to 103 in number. 10. TA can provide education and training to its own pilots. Weaknesses 1. The irrational prices determined by rivals and rapid increase in passanger capacity caused less income margins in 2006. 2. Depending upon the increase in number of planes financed by leasing, the lease expenditure increased 65 percent and reached to 34 million USD. 3. Income from operations, which was 89 million USD in 2005, has reduced to 22 million by the effect of 9 percent increase in operational expenses. 4. Despite 17 percent increase in consumption of fuel, 49 percent increase of fuel expenses with respect to dollars has affected EBITDA margin negatively. 5. There is not an ERP software the company uses. Total WEIGHT 0.10 0.08 0.09 0.07 0.06 0.06 0.05 0.06 0.12 0.07 0.08 0.04 0.04 0.06 0.02 1 RATING 2 3 3 4 3 3 2 3 3 2 2 2 1 2 2 WEIGHTED SCORE 0.20 0.24 0.27 0.28 0.18 0.18 0.10 0.18 0.36 0.14 0.16 0.08 0.04 0.12 0.04 2.57

Table 5.2. IFE Matrix for the Turkish Airlines on Domestic Air Transportation The Turkish Airlines total weighted score of 2.57 indicates that they are slightly above average in formulating strategies that capitalise on their strengths and minimise their weaknesses.

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 Competitive Profile Matrix

Turkish Airlines
CRITICAL SUCCESS FACTORS Advertising Product Quality Price Competitiveness Management Customer Loyalty Market Share Customer Service E-commerce Management Experience Branding TOTAL WEIGHT 0.08 0.14 0.09 0.05 0.12 0.20 0.02 0.10 0.05 0.15 1 RATING 2 4 3 3 4 4 4 2 4 3 SCORE 0.16 0.56 0.27 0.15 0.48 0.80 0.08 0.20 0.20 0.45 3.35

Onur Air
RATING 2 2 4 4 3 3 1 3 3 1 SCORE 0.16 0.28 0.36 0.20 0.36 0.60 0.02 0.30 0.15 0.15 2.58

Pegasus
RATING 3 3 3 4 2 2 2 4 2 4 SCORE 0.24 0.42 0.27 0.20 0.24 0.40 0.04 0.40 0.10 0.60 2.91

Atlasjet
RATING 3 3 3 3 3 3 3 3 2 2 SCORE 0.24 0.42 0.27 0.15 0.36 0.60 0.06 0.30 0.10 0.30 2.80

Table 5.3. Competitive Profile Matrix for the Turkish Airlines on Domestic Air Transportation

In the Competitive Profile (CPM) Matrix above there are ten key success factors for the Turkish Airlines. They are advertising, product quality, price competitiveness, management, customer loyalty, market share, customer service, e-commerce, management experience, and branding. TA's three major competitors in the aviation industry are Onur Air, Pegasus, and Atlasjet. TA is often seen as the highest quality company providing excellent service. Onur Air is viewed as the cost leader in the industry. Based on the data contained in the CPM, Atlasjet and Pegasus are the most competitive followed by Onur Air and then by TA.

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In terms of price competitiveness Onur Air is the best company, in customer service all companies in the sector are not doing well.

5.2. Matching Stage Strengths-Weakness-Opportunities-Threats (SWOT) Matrix

STRENGTHS S 1.In 2006, TA has won second standing in one of the AEA service quality evaluation criteria concerning proportion of on time departures in total departures, via achieving a proportion of 83,9 percent. 2. TA is qualified to take the worlds # 1 certificate called as IOSA, concerning airport security management and given by IATA. 3. In December 2006, TA has decided to join to the biggest global airline alliance named as Star Alliance. 4. All of TA domestic offices and agents passed to the e-ticket system. 5. TA transported 8.9 million passangers in domestic filights, in 2006, which is 23.8 percent higher than previous year. 6. Through the period between January and December 2006, parallel to the growth in fleet; TA increased its staff by 37.3 percent. 7. In the period of 2006, TA has transported 159,873 tones of cargo, which is 10 percent higher than 2005 figure, additionally, the revenue gathered from cargo has increased 14 percent. 8. In June 2006, TA qualified for ISO 9001:2000 Quality Certificate. 9. With the inclusion of 25 new generation planes, the average age of planes in the fleet decreased to 7,3 years, and the number of planes rose by 24.4 percent and reached to 103 in number. 10. TA can provide education and training to its own pilots OPPORTUNITIES O 1. The portion of air transpoortation in total transportation is very low with respect to land or maritime transportation. The Turkish domestic air transportation market is 20 percent less than that of European counterparts. 2. The low passanger loadings and low marketing and distribution expenses are some of the important opportunities that TA holds. It is anticipated that TA will increase its present 69 percent passanger loading percentage to 71 percent in 2007, and to WEAKNESSES W 1. The irrational prices determined by rivals and rapid increase in passanger capacity caused less income margins in 2006. 2. Depending upon the increase in number of planes financed by leasing, the lease expenditure increased 65 percent and reached to 34 million USD. 3. Income from operations, which was 89 million USD in 2005, has reduced to 22 million by the effect of 9 percent increase in operational expenses. 4. Despite 17 percent increase in consumption of fuel, 49 percent increase of fuel expenses with respect to dollars has affected EBITDA margin negatively. 5. There is not an ERP software the company uses.

SO STRATEGIES 1.Segment the market

WO STRATEGIES
1.An effective ERP program should be adopted to the firm.(W5,O2-O4)

in different customer groups that look for shortor long- haul, high frequency, low fare Airlines and develop focussed marketing strategies.(S5-S9,O1-O2-O4) 2. Enhance the amount of short haul flights to new cities and airports(S7-S3,

O3-O7)

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73 percent in 2010. 3. Due to the direct relation and interaction among the industries of tourism and transportation, the opportunity of integrating touristic activities and domestic air network which is developed in recent years has arised. 4. In addition to the tax reductions in ticket fees, the grant providing the freedom of self pricing for airway companies resulted in the opportunity of offering lower prices for the corresponding firms. 5. Though not all of them are operating, the existence of many airports in the Eastern part of the country which has inconvenient topographic structure provides the advantages of responding the rapid demand for air transportation, and widening the network in national scales. 6.Through the EU integration process the adoption of EU standards concerning aviation security and safety in Turkish Aviation will be provided. Hence, the security will be increased and the robust development of Turkish Aviation will be provided. 7. The domestic passanger density in January 2006 has grown 385 percent compared to January, 2005. THREATS T 1. There are five firms except TA operating in the industry. It is expected that the new firms will enter to the industry and that will increase competition, which is highly competitive presently in the industry. 2.The rapid and unplanned growth in the industry increased the vacant positions for licensed staff needed, and training institutions could not respond vacancies resulting from this rapid growth. 3.The rise of fuel prices in the world and the the excess taxes on the fuel prices in Turkey: the fuel costs are very essential in pricing process of the tickets. The recent increases in fuel prices all over the world has negative effects on air transportation. 4. Turkey have borders to Middle East countries, the bottle and political turmoil in this region and the uncertainty in geopolitics will negatively affect the Turkish aviation which is operating so close to the corresponding region, consequently can be a barrier to the development of tourism and air transportation. 5. In order to survive, the low scale aviation companies added small sized aircrafts to their fleets. Additionally, for the sake of lower prices, different flight alternatives for different levels of economic conditions that passangers have, have been presented. A lot of new flight routes from different cities to Istanbul including Antalya, Izmir, Ankara,

ST STRATEGIES
1.Integrate or take-over with tour operators to provide all in one low price weekend and short holiday packages to coastal areas or national.(S1-S6-S9,T1-T5) 2. TA should diversify its flight points to Eastern Anatolia and South East Anatolia regions(S9,S6-T1-T5). 3. The frequency of the flights should be increased to the Eastern Anatolia and South East Anatolia regions.( S5-S9, T1) 4. TA should educate effectively both its and other private firms personel by developing its education center.(S6-S10, T2)

WT STRATEGIES
1. Increasing the number of small sized aircrafts decrease the negative effects of the fuel prices.

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and Erzurum has been started.

Table 5.4. SWOT Matrix for the Turkish Airlines on Domestic Air Transportation

Strategic Position and Action Evaluation (SPACE) Matrix

INTERNAL STRATEGC POSITION Financial Strength (FS) From 2005 to 2006, EBITDA Margin decreased from 17.22 percent to 16.25 percent. In 2006, total assets increased to 3.272 USD and recorded an increase of 15 percent compared to 2005. Firm is strong financially in comparison to competitors. In 2006, Shareholders equity increased to 1.145 million USD with a 12 percent increase with respect to 2005. From 2005 to 2006, Current Ratio increased from 0.69 percent to 0.80 percent. Total

Rating
2 4 3

EXTERNAL STRATEGIC POSITION Environmental Stability (ES) Inflation falled down 10 percent in 2006 in Turkey The increase in the effective use of aerial transportation in domestic tourism. The level of competition has increased by the inclusion of low seat capacity small planes by private firms in the industry, and low prices. Except TA there are five more companies operating in the domestic market and in the foreseeble future it is anticipated that new entrants to the market will occur. The pressure from competitors is very high Total

Rating
-2 -3 -4

-5

2 14 Rating -3 -2

-4 -18 Rating 6 3

Competitive Advantage (CA) The company holds 60 percent share of market in domestic scale. From 2005 to December 2006, seat capacity increased by 24 percent.
With the inclusion of 25 new generation planes, the average age of planes in the fleet decreased to 7,3 years, and number of planes rose by 24.4 percent and reached to 103 in amount. The number of staff has been reduced by 25 percent from 2002 to present.

-2

-4

In the whole offices and agents of the firm the eticket sales occur. Total

-1 -12

Industry Strength (IS) In 2006, 80 percent of total revenues are held by earnings from passangers. By 2006 March, Turkish aviation sector has 204 passenger planes, 24 cargo planes and capasity of 38 thousand passengers. In cargo transportation, through the years 2002 and 2005, 74 percent increase in domestic cargo industry has been enjoyed, and by September 2005, a total capacity of 1.041.623 tones of cargo has been reached. There are 70 airports that are available for domestic industry, this is an advantage for responding to the rapidly increasing demand and to expending countrywide aerial transportation. The aviation sector is affected negatively because of terrorist attacks. Total

2 19

Table 5.5. Factors That Make Up the SPACE Matrix Axes for the Turkish Airlines on Domestic Air Transportation
The average score for FS is: 14 / 5 = 2.8 The average score for CA is: (-12)/ 5 = (-2.4) The average score for ES is: (-18) / 5 = (-3.6) The average score for IS is: 19 / 5 = 3.8

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The two scores on the x-axis are added (IS + CA =3.8 2.4 = 1.4) and the resultant point is plotted on X. The two scores on the y-axis are added (FS + ES = 2.8 3.6 = -0.8) and the resultant point is plotted on Y. The intersection of the new xy point is drawn and a directional vector is drawn.
Conservative Aggressive

FS

CA

IS

Defensive

ES

Competitive

Figure 5.1. SPACE Matrix for the Turkish Airlines on Domestic

Air Transportation The Turkish Airlines located in the Competitive Quadrant because of the directional vector appear in the lower-right of the diagram. Based on the SPACE Matrix, TA should use a Competitive Profile which has competitive advantages in a high-growth industry. Thus, TA should first look at some form of integration, followed by market penetration, market development, product development, and finally, joint ventures.

Boston Consulting Group (BCG) Matrix

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Functions

Revenues(USD)

%Revenue

Profits(USD)

%Profits

%Market Share

% Growth Rate

1 2

Passenger Cargo

2.445.000 222.000

92 8

122250 15540

89 11

0.6 0.55

+10 +7

Table 5.6. SBUs in Terms of Sales and Profits in Turkish Airlines on Domestic Air Transportation

RELATIVE MARKET SHARE POSITION

High High +20

1.0

Medium 0.50

Low 0.0

I N D U S T R Y S A L E

G R O W T H

Stars
Medim
0

Question Marks

R A T E (%)

Cash Cows

Dogs

Low -20

Figure 5.2. BCG Matrix for Turkish Airlines on Domestic Air Transportation

The BCG Matrix is used to compare the different divisions or departments within a single organisation. The primary reason to use this matrix is to visually analyse which divisions or departments are making the most profit and which ones are not. It also shows which ones have the largest relative market share as well as overall sales within the organisation. For this matrix we have chosen to evaluate the Passenger and Cargo function of the TA. Both Passenger and

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Cargo functions are positioned on Division II (Stars) according to their market share and industry growth rate percentages. Passenger function has a greater circle and pie slice compared to the cargo function because of bigger revenue and market share. Forward, backward, and horizontal integration; market penetration; market development; and product development are appropriate strategies for these functions to consider.

Internal- External (IE) Matrix In the matrix below,both passenger and cargo functions are in cell I. This means that the company should grow and build. The company should pursue an intensive or integrative strategies. This includes market penetration, market development, and product development for the intensive strategies. For the integrative strategies backward integration, forward integration, and horizontal integration strategies should be considered.

Functions

Revenues(USD)

%Revenue

Profits(USD)

%Profits

EFE

IFE

1 2

Passenger Cargo

2.445.000 222.000

92 8

122250 15540

89 11

3.6 3.2

3.5 3.5

Table 5.7. SBUs in Terms of Sales and Profits in Turkish Airlines on Domestic Air Transportation

The IFE Total Weighted Score

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Strong 3.0 to 4.0 High 3.0 t. 3.99 Medium 2.0 to 2.99 Low 1.0 to 1.99

Average 2.0 to 2.99

Weak 1.0 to 1.99

1 2

II

III

The EFE Total Weighte d Score

IV

VI

VII

VIII

XI

Figure

5.3. IE Matrix for the Turkish Airlines on Domestic Air Transportation Grand Strategy Matrix

The Turkish Airlines (TA) is placed in Quadrant I. TA has a strong competitive position because of their ability to increase sales above their competition. In addition, TA is a financially strong company that has experienced a steady rate of growth. TA should continue to implement strategies that strengthen their market position. TA should also consider using excess resources for backward, forward and horizontal integration, and market penetration and market development to increase their competitive advantage.

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RAPID MARKET GROWTH Quadrant II Quadrant I 1. Market development 2. Market penetration 3. Product development 4. Forward integration 5. Backward integration 6. Horizontal integration 7. Concentric diversification WEAK COMPETITIVE POSITION Quadrant III Quadrant IV STRONG COMPETITIVE POSITION

SLOW MARKET GROWTH

Figure 5.4. The Grand Strategy Matrix for Turkish Airlines on Domestic Air Transportation

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5.3. Decision Stage Quantitative Strategic Planning Matrix (QSPM)

Key Factors Key External Factors Opportunities 1. The portion of air transpoortation in total transportation is very low with respect to land or maritime transportation. The Turkish domestic air transportation market is 20 percent less than that of European counterparts. 2. The low passanger loadings and low marketing and distribution expenses are some of the important opportunities that TA holds. It is anticipated that TA will increase its present 69 percent passanger loading percentage to 71 percent in 2007, and to 73 percent in 2010. 3. Due to the direct relation and interaction among the industries of tourism and transportation, the opportunity of integrating touristic activities and domestic air network which is developed in recent years has arised. 4. In addition to the tax reductions in ticket fees, the grant providing the freedom of self pricing for airway companies resulted in the opportunity of offering lower prices for the corresponding firms. 5. Though not all of them are operating, the existence of many airports in the Eastern part of the country which has inconvenient topographic structure provides the advantages of responding the rapid demand for air transportation, and widening the network in national scales. 6.Through the EU integration process the adoption of EU standards concerning aviation security and safety in Turkish Aviation will be provided. Hence, the security will be increased and the robust development of Turkish Aviation will be provided. 7. The domestic passanger density in January 2006 has grown 385 percent compared to January, 2005. Threats 8. There are five firms except TA operating in the industry. It is expected that the new firms will enter to the industry and that will increase competition, which is highly competitive presently in the industry. 9. The rapid and unplanned growth in the industry increased the vacant positions for licensed staff needed, and training institutions could not respond vacancies resulting from this rapid growth. 10.The rise of fuel prices in the world and the the excess taxes on the fuel prices in Turkey: the fuel costs are very essential in pricing process of the tickets. The recent increases in fuel prices all over the world has negative effects on air transportation. 11. Turkey have borders to Middle East countries, the bottle and political turmoil in this region and the uncertainty in geopolitics will negatively affect the Turkish aviation which is operating so close to the corresponding region, consequently can be a barrier to the development of tourism and air transportation. 12. In order to survive, the low scale aviation companies added small sized aircrafts to their fleets. Additionally, for the sake of lower prices, different flight alternatives for different levels of economic conditions that passangers have, have been presented. A lot of new flight routes from different cities to Istanbul including Antalya, Izmir, Ankara, and Erzurum

Weight

STRATEGIC ALTERNATIVES Market Market Product Penetration Development Development AS TAS AS TAS AS TAS

0.12

0.48

0.48

0.24

0.06

0.18

0.12

0.12

0.10

0.40

0.40

0.30

0.07

0.28

0.21

0.21

0.08

0.04

0.08

0.08

0.08

0.12

0.36

0.36

0.24

0.12

0.36

0.36

0.12

0.06

0.12

0.12

0.18

0.09

0.27

0.18

0.18

0.07

0.07

0.14

0.21

0.21

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has been started. Key Internal Factors Strengths 1.In 2006, TA has won second standing in one of the AEA service quality evaluation criteria concerning proportion of on time departures in total departures, via achieving a proportion of 83,9 percent. 2. TA is qualified to take the worlds # 1 certificate called as IOSA, concerning airport security management and given by IATA. 3. In December 2006, TA has decided to join to the biggest global airline alliance named as Star Alliance. 4. All of TA domestic offices and agents passed to the e-ticket system. 5. TA transported 8.9 million passangers in domestic filights, in 2006, which is 23.8 percent higher than previous year. 6. Through the period between January and December 2006, parallel to the growth in fleet; TA increased its staff by 37.3 percent. 7. In the period of 2006, TA has transported 159,873 tones of cargo, which is 10 percent higher than 2005 figure, additionally, the revenue gathered from cargo has increased 14 percent. 8. In June 2006, TA qualified for ISO 9001:2000 Quality Certificate. 9. With the inclusion of 25 new generation planes, the average age of planes in the fleet decreased to 7,3 years, and the number of planes rose by 24.4 percent and reached to 103 in number. 10. TA can provide education and training to its own pilots. Weaknesses 11. The irrational prices determined by rivals and rapid increase in passanger capacity caused less income margins in 2006. 12. Depending upon the increase in number of planes financed by leasing, the lease expenditure increased 65 percent and reached to 34 million USD. 13. Income from operations, which was 89 million USD in 2005, has reduced to 22 million by the effect of 9 percent increase in operational expenses. 14. Despite 17 percent increase in consumption of fuel, 49 percent increase of fuel expenses with respect to dollars has affected EBITDA margin negatively. 15. There is not an ERP software the company uses. Sum Total Attractiveness Score

0.10 0.08 0.09 0.07 0.06 0.06

4 3 3 4 2 3 3 4 1

0.40 0.24

4 3 -

0.40 0.24

4 3 -

0.40 0.24

0.21 0.24 0.12 0.15 0.18 0.48 0.07

3 2 1 2 3 3 1

0.21 0.12 0.06 0.10 0.18 0.36 0.07

2 1 1 2 3 3 2

0.14 0.06 0.06 0.10 0.18 0.36 0.14

0.05 0.06 0.12 0.07

0.08 0.04

2 2 3

0.16 0.08 0.12

1 2 2

0.08 0.08 0.08

1 2 2

0.08 0.08 0.08

0.04

0.06 0.02

3 1

0.18 0.02 5.32

2 1

0.12 0.02 4.64

2 1

0.12 0.02 3.94

Table 5.8. QSPM for Turkish Airlines on Domestic Air Transportation Comparing the attractiveness of both strategies, and looking to the extent to which key external and internal critical success factors are capitalised upon or improved, it seems that the market penetration strategy is the most attractive strategy for the Turkish Airlines on domestic air transportation.

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CONCLUSIONS
This thesis has examined the main topics of strategic management including its historical development, its definitions in literature, and its processes. There are many different strategic management process models in the literature. The thesis has used Fred Davids Strategic management model. The model, which consists of three stages: strategy formulation, strategy implementation and strategy evaluation, has been described theoretically. Then a case study of the Turkish Airlines on Domestic Air Transportation has been designed. The data concerning the case has been gathered from the department of Strategic Planning and Investment Management of the Turkish Airlines. In the application of Davids strategic management model, strategy formulation framework has been applied to the Turkish Airlines on Domestic Air Transportation and strategy suggestions have been made to the firm. The thesis is divided into two parts. The first part, called, the theoretical description, consists of three chapters. In the first chapter, the historical foundation of the strategic management, the definition of the strategic management and the stages of the strategic management have been described, and a comprehensive strategic management model has been introduced. In the second chapter, strategy formulation, strategy implementation, and strategy evaluation activities has been examined. Strategy formulation activities include,

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firstly, forming mission and vision statements, assessment of internal and external environment, identfying alternative strategies, and choosing the best strategy for the organisation. Strategy implementation is the sum of the activities and choices required for the execuation of a strategic plan. Strategy evaluation is the systematic documentation of the consequences of using the strategic management process and the determination of its worth in order to make decisions. In the third chapter, a comprehensive strategy-formulation framework has been analyzed. This framework consists of three stages: input stage, matching stage, and decision stage. Input Stage includes the External Factor Evaluation (EFE) Matrix, the Internal Factor Evaluation (IFE) Matrix, and the Competitive Profile Matrix (CPM). Input Stage summarises the basic input information needed to formulate strategies. Matching Stage focuses upon generating feasible alternative strategies by aligning key external and internal factors. Its techniques include the Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix, the Strategic Position and Action Evaluation (SPACE) Matrix, the Boston Consulting Group (BCG) Matrix, the Internal-External (IE) Matrix, and the Grand Strategy Matrix. Decision Stage involves a single technique, the Quantitative Strategic Planning Matrix (QSPM). A QSPM reveals the relative attractiveness of alternative strategies and thus provides objective basis for selecting specific strategies.

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The second part, called, practice, includes two chapters. In the first chapter, the case study of the Turkish Airlines on Domestic Air Transportation has been designed. The case study comprises the history of Turkish Airlines, chief characteristics of Turkish Airlines, and the Turkish Aviation Industry. In the second chapter, which is involved in the application part of the thesis, firstly, IFE, EFE and CPM Matrices have been constructed for the TA to obtain internal and external position of the firm. Then, SWOT, SPACE, BCG, IE, and Grand Strategy Matrices have been generated to find appropriate alternative strategies for the firm. Among many alternative strategies, market penetration, market development and product development strategies have been the most adaptable strategies for the TA. Finally, QSPM has been constructed for the TA. These three strategies derived from matching stage, has been compared in QSPM diagram and the best strategy for the TA is appeared to be market penetration. In the application of the strategy formulation framework to the Turkish Airlines on domestic air transportation, I have come accross some advantages and disadvantages. These can be stated as positive features and limitations of the framework.

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Positive Features

One of the positive features of the QSPM in the framework is that sets of strategies can be examined similtaneously in QSPM. There is no limit to the number of strategies that can be evaluated in QSPM. Another positive feature of QSPM is that every strategist can effectively apply, develop, expand, and update QSPM with a personal computer. There is a software programme called checkmate comprising the whole process of Davids strategy formulation framework. This programme makes easier for the user to reveal pertinent strategies. QSPM can be adapted for use by small and large for-profit and nonprofit organisations. The sum total attractiveness scores can reveal the relative attractiveness of many different types of strategies for many different types of organisations. Limitations

David has used matrices in the framework eclectically. Each tool in the framework has different theoretical, philosophical and sociological

assumptions. This shows that each tool may bring about contrasting outcomes. It is inappropriate to compare the outcomes of BCG and IE Matrices with those of other matrices in a single framework. Because, IE and BCG matrices suggest alternative strategies for the divisions/departments of the

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firm. However the SPACE Matrix, Grand Strategy Matrix, and SWOT Matrix analyze the overall firm and suggest alternative strategies. This model always requires intuitive judgments and educated assumptions. The numerical values that are assigned as rating and attractiveness scores are judgmental decisions although they should be based on objective information. QSPM is that it can only be as good as the prerequiste information and matching analyses upon which it is based. Sometimes personal preferences get unduly embedded in the strategy formulation process (David, 1986). Another point is that the practitioner as an hired consultant may be serving to the interests of top managers or owners of the firm and may disregard the interests of disadvantaged (silenced and marginalised) groups, this may bring about deleterious consequences for the firm. The final criticism is related to the issue of cultural feasibility. At the end of the application of Davids strategy formulation framework, the analyst would come up with a set of strategies that do not commensurate with values, norms, goals, and objectives of the firm. Under such circumstances, the suggestions of the practitioner would be impractical.

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