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Assignment 3 – Individual Assignment 2 Jul 2010 Semester 2010
Completed By Woo Gim Chuan Marcus (J0704245)
Name of Tutor (T01) XXX
BUS 488 Strategy - T01
Question 1 AirAsia, which is one of the earliest low cost carriers (LCC) in Asia, has become a LCC since 2001. So far, it has expanded its network from Malaysia to Thailand to Singapore, Macau and even the Mainland China in 2006. In short, AirAsia “jumped out” from an intra-Malaysia and Thailand market to a “real AirAsia” in the continent. Thus, what are the possible core competencies to ensure that there is quantum leap to success? The internal analysis on the company below will answer the question. Resources, Capabilities & Core Competencies Analysis a) Accounting Ratio Analysis In 2004, AirAsia’s earnings margin before interest and taxes (16.8), return on capital employed (14.6) and return on equity (37.7) accounting ratios were above the industry average – 14.5 is the industry average for earnings margin, 11.6 for return on capital employed and 21.2 for return on equity. This above average results indicates that the company has been managed well and thus is able to achieve high above-average returns. The increase in current ratio from 1.24 (US$49. 206 million / US$39.643 million) to 5.60 (US$230.024 million / US$41.099 million) also serves as a confident booster to investors and shareholders in that AirAsia’s solvency had strengthened and thus is able to fulfill its debt obligations. In fact, the debt-to-asset ratio1 in the last 5 years was low and decreasing too. As a matter of fact, in 2005, it was merely 0.14, which was comparatively lower than many low cost carriers. b) Finance Resources AirAsia’s net profit ending Jun 2005 was reported US$29.2 million, a 126% increase year-on-year. The end of June 2005 financial summary showed that AirAsia, the leading low cost airline in Asia, had a huge reserve (bank and cash balances) of US$86.6 million. This is the company’s strength as very few low cost airlines of similar size have
Debt-to-Asset = Total debt / Total asset
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BUS 488 Strategy - T01
such large reserves. With such huge reserves and low debt-to-asset ratio, AirAsia is thus capable of generating internal funds to finance any expansion. It is certainly AirAsia’s strength. c) Organisation Design and Organisational Resources AirAsia’s organisational structure is rather simple and flat as it involves a group of staff in the company reporting to one manager. This serves AirAsia well as the business requires a structure with fewer levels of management so as to achieve more consistency and cost reduction. In addition, the cost leadership strategy that the company adopted also allows AirAsia to focus more intensely on areas such as in/out-bound logistics, operations, marketing, services and customers. This in turn helps to create synergy and capability to deliver the full spectrum of low cost carrier business. d) Physical Resources Despite having a large fleet of Boeing 737 aircraft for operation, AirAsia still continues to invest heavily. This includes the acquisition of more fuel-efficient aircraft (A320) so that the company can have sufficient capacity to meet the growing needs and demands of their customers as well as to continue to keep its cost low. The new aircraft can lower fuel usage by about 12%, an important cost saving, as fuel accounted for almost 50% of the total operating costs for the company over a period of time. e) Technological Resources AirAsia was the first airline in Southeast Asia to utilise e-ticketing so that traditional travel agents can be bypassed. This implementation saves the cost of issuing physical tickets and eliminates the need for large and expensive booking and reservation systems. To further exploit technologies, AirAsia made it possible for customers to purchase tickets either from post offices or designated bank teller (ATM) machines. In short, AirAsia’s strength is also about the ability to leverage on technologies well and ahead of its competitors to increase sales and lower costs.
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The ability to innovate and come up with unique innovations to lower costs and increase revenues shows that AirAsia possesses substantial quality innovation resources that are valuable. human resource management. is surely AirAsia's strength. offer of shares or stock options. Most notably. it was named the “Developing Airline of the Year” (by Airfinance Journal) and the “Asia Pacific Airline of the Year” (by Centre for Asia Pacific Aviation.BUS 488 Strategy . To provide further aircrew and cabin incentives. All these efforts not only helped to improve productivity. AirAsia is also able to leverage on innovative ideas to derive substantial ancillary revenues from additional services. the company’s CEO. the International Herald Individual Assignment 2 Page 4 of 31 . it also develops aircraft advertising by converting its planes into “flying billboards”. AirAsia also adopted a sector pay policy that gives extra incentives and thus this resulted in the company needing fewer crews per flight (106 per aircraft) as compared to other low-cost airlines (110 per aircraft). h) Reputational Resources AirAsia’s success has been widely recognised. in 2003. AirAsia has managed to design its aircraft cabins that can minimise wear and tear. In addition. cleaning time and cost. Similarly. For instance. In summary. it also further strengthened employer-employee relationships. Tony Fernandes has also won several recognitions. particularly the ability to motivate and improve productivity of the staff.T01 f) Human Resources Management Although the employees were not unionised and the salaries offered by the company were below those of its rivals. the company also won several prestigious awards. For instance. In 2004 and 2005. all employees are offered a wide range of incentives that includes productivity and performance-based bonuses. AirAsia is still able to keep its work force motivated by providing a remuneration policy that is competitive and attractive. g) Innovation Resources and Product Development So far. Consequently. CAPA). the company also have their own branded credit card and offers corporate travel services. For instance. This innovative work allows for quicker turnarounds between flights and helps increase revenues.
this eliminates credit risk totally.T01 Tribune listed Mr Tony Fernandes in its Visionaries and Leadership series in 2003. customers who wish to purchase their air tickets need to make payment almost immediately upon booking. when AirAsia purchases insurance any policies to insure against pure risk. For a synopsis of all the points that have been discussed. AirAsia has little exposure to credit risk as it does not lend money to any external parties. (2) price risk. and (3) credit risk. which was substantially lower than the price per barrel of US$70 in the late 2005. Better still. AirAsia was subsequently named as one of the “Best Newly Listed Companies” and Asia’s “Best Managed Company in the Airlines and Aviation Sector by Euromoney after its IPO. the types of risks AirAsia faces include: (1) pure risk. to mitigate price risk. With just 3 years into operations. Given the positive perceptions of AirAsia’s reputation. For instance. especially the shareholders. refer to Appendix I. Hence. So far. AirAsia purchased insurance policies to mitigate pure risk although it is done and operated a bit differently as it adopts an integrated approach risk management that goes beyond the traditional parameters of what is insurable. the brand name is certainly the company's strengths. AirAsia hedged fuel prices at US$42 a barrel for the first half of 2005. i) Risk Management In general. it also makes a conscious effort to acquire them at a much lower rate lower than other LCCs. Value Chain Analysis of AirAsia Individual Assignment 2 Page 5 of 31 . AirAsia managed to be listed publicly in November 2004 with support from bankers and venture capitalists. AirAsia’s holistic approach to risk management effectively is viewed favourably by its stakeholders most of the time.BUS 488 Strategy . He was consequently named the “Asia Pacific Aviation Executive of the Year” in 2004 and 2005 (by CAPA) and is one of the 25 stars of Asia (by Businessweek). In addition.
T01 The value chain analysis is used to evaluate the value of each particular functional activity that is added to the organisation’s products or services as seen in Diagram 1.BUS 488 Strategy . Diagram 1: Value Chain For Airline Industry a) Logistics This involves all areas of receiving. AirAsia only operates on a single type of aircraft. storing of inputs when producing outputs. Based on a Individual Assignment 2 Page 6 of 31 . the Boeing 737-300. So far.
AirAsia also has 1382 employees and they received proper on-the-job training workshops so that they can perform multiple roles effectively within a simple and flat organisation structure. So far. As of late 2005. In addition. it was also reported in prominent journals and magazines such as ABJ and AWM that many customers felt that AirAsia’s cabin crew demonstrated professionalism when carrying out their duties on air.BUS 488 Strategy .T01 report published by Aero Connections in 2004. Based on the company’s 2003 annual report. AirAsia had also managed to achieve good operating benchmarks in terms of flights on time and baggage handling where in 2004. For instance. Not only that.9% respectively. AirAsia has always been stringent about standards and procedures. d) Marketing and Sales It involves all activities that inform customers about their products/services. that particular model was the best selling commercial jet of all times due to its efficiency and cost effectiveness. AirAsia had joined ventures with GE Engine Services for a business alliance that allows the latter to be in charge of maintaining all AirAsia’s aircraft engines in the next five years. AirAsia is aware that maintaining its passenger safety is of paramount importance – as indicated in the surveys in the United States and Japan. b) Operations It processes inputs to provide valuable products/services. AirAsia operated 32 Boeing 737 aircraft that run over 60 routes across Southeast Asian regional network. His well thought out statements often reinforce AirAsia’s positioning as a Individual Assignment 2 Page 7 of 31 . the company registered 88% and 99. AirAsia has promoted its company without incurring high sales and marketing expenses. its aircraft interiors are also outfitted with signature red carpeting and plush leather seats to enable its guests to travel comfortably. c) Outbound Logistics This involves delivering products/services into a distribution channel or to the final destination. including those that induce and facilitate customers in making purchases. its CEO Tony Fernandes always wears a red AirAsia baseball cap in any of his interviews.
T01 small entrant firm battling against giant industry incumbents that also offer low prices. effective. Penetrate and stimulate to potential markets Multi-skilled staffs means efficient and incentivised workforce. Besides that. AirAsia emphasises a lot on maintaining a high quality service to all its passengers such as punctuality rate and excellent baggage-handling performance. Simple proven business model that consistently delivers that lowest fares. Individual Assignment 2 Page 8 of 31 .BUS 488 Strategy . e) Service AirAsia is one of the few airlines that had the shortest turnaround time. As such. Table 1: Summary of AirAsia’s Strengths and Weakness Core Competencies of AirAsia The analysis on AirAsia’s resources as well as primary and support activities are evaluated using the Resources-Competency Model as shown in Table 2 below. when required. This deal involved global sponsorship and advertising. Single type fleet minimise maintenance fees and easy pilot dispatch. Hence. focused and aggressive management. this allows AirAsia to benefit from conducting more flights a day. Fewer management levels. it also invested heavily and so far. Heavy reliance on outsourcing. around 25 minutes as opposed to 45 to 120 minutes recorded by other airlines. • • • Weaknesses Service resource is limited by lower costs. The summary of strengths and weaknesses of AirAsia is appended in Table 1 below: Strengths • • • • • • Low cost operations. its major sponsorships included being the “Official Low Fare Airline” for football giant Manchester United. Limited human resources could not handle irregular situation.
BUS 488 Strategy . Valuable Y Y Rare Y Y Difficult to imitate N N Nonsubstitutable N N Competitive consequences Temporary Competitive Advantage Temporary Competitive Performance implications Average returns to Aboveaverage returns Average returns to Above- Individual Assignment 2 Page 9 of 31 . The possession of tacit knowledge to build a business by leveraging on new technologies (internet). rare. difficult to imitate and non-substitutable. Possess a large and standardised fleet of aircraft to keep maintenance costs low as well as a large reserve with access to external financing readily that can be leveraged to invest in infrastructure to further lower costs. Able to integrate and execute all aspects of airline operations very effectively. The religious zeal to cost-avoidance coupled with tacit knowledge to build extremely efficient processes to enable it to execute its business model (low cost). Excellence in promoting brand awareness effectively without incurring high sales and marketing expenses. the company’s capabilities are assessed based on the four criteria . Possess procurement know-how that leads to lower costs and expenses. The evaluation results so far revealed that two core competencies below: (1) (2) The possession of tacit knowledge to build a business by leveraging on new technologies (internet). Possess the capability to train employees to perform multiple and execute the procedures that enhance operations protocols. Able to leverage on financial resources to provide attractive numeration packages that help to motivate and incentivise.valuable. Bundle of Resources involved Technology + Human + Financial + Innovation + Infrastructure Technology + Human + Financial + Innovation + Infrastructure Technology + Human + Financial + Innovation + Infrastructure Human + Financial + Innovation Technology + Human + Financial + Innovation + Infrastructure Human + Financial + Innovation + Infrastructure Human Resources Technology Procurement Human + Financial Technology + Human + Financial + Innovation + physical Technology + Human + Financial + Innovation Table 2: Resources-Competency Model Used On AirAsia’s Resources. Implement flexible work rules and streamline administrative functions so that employees are allowed to perform multiple roles. All these help to keep costs low. The religious zeal to cost-avoidance coupled with tacit knowledge to build extremely efficient processes to enable it to execute its business model (low cost). The evaluation conducted on AirAsia’s capabilities is appended in Table 3 below: Capability Possess the ability to leverage on technologies and economies of scales to keep costs low.T01 Functional Activities Inbound Logistics Operations Outbound Logistics Marketing & Sales Services Infrastructure & Finance Capabilities Possess the ability to leverage on technologies and economies of scales to keep costs low. Able to integrate the various resources and functional activities to meet the needs (safety and low airfare) of cost-conscious customers. Primary and Support Activities To determine whether AirAsia has any core competencies (sustainable competitive advantages).
Possess procurement know-how that leads to lower costs and expenses. Besides that. “the lower the price. The religious zeal to cost-avoidance coupled with tacit knowledge to build extremely efficient processes to enable it to execute its business model (low cost). Excellence in promoting brand awareness effectively without incurring high sales and marketing expenses.T01 Advantage Possess the capability to train employees to perform multiple and execute the procedures that enhance operating standards.BUS 488 Strategy . The better designed cabins also resulted in lower loading and unloading costs as things got done faster which in turn leads to better Individual Assignment 2 Page 10 of 31 . Able to integrate the various resources and functional activities to meet the needs (safety and low airfare) of cost-conscious customers. AirAsia’s success is based on the following key factors: a) Cost Effectiveness AirAsia puts very strong emphasis on lowering all avoidable costs so that it can continue to provide low fares and yet remain profitable. Y Y Y N N N N N N N N N Competitive Parity Competitive Parity Competitive Parity Sustainable Competitive Advantage Competitive Parity Sustainable Competitive Advantage Competitive Parity average returns Average returns Average returns Average returns Above-average returns Average returns Above-average returns Average returns Y Y Y Y Y Y Y N Y N N Y N N Y N Table 3: Evaluation of AirAsia’s Capabilities Success Factors of AirAsia As AirAsia continues to compete with other LCC (both existing and new) in Asia which also may adopt low-cost strategy. what have to remember and realise that the way customers differentiate them from their competitors will be strictly on “fare” and reputation. As such. As the saying goes. Able to leverage on financial resources to provide attractive numeration packages that help to motivate and incentivise. AirAsia has also designed its aircraft cabins that minimise wear and tear as well as cleaning time so that cost associated to these areas can be lowered. The possession of tacit knowledge to build a business by leveraging on new technologies (internet). This means the company has to cut the cost of flight operation by flying to and from airports that offer cheaper take-off and landing fees. the higher the load factor”. passengers also were not provided with meals and entertainment as well as amenities such as pillows and blankets.
AirAsia offers point-to-point flights on short-haul routes – less than 4 hours flight time. it should be noted that the cost leadership strategy works on the lowest costs. the turnaround time of an aircraft can be reduced greatly – AirAsia clocked the regions fastest turnaround time at only 25 minutes. such high frequency of services can also attract business travellers since most of the time they are able to save time and catch their connecting flights on time. In some instances. Besides. to ensure cost effectiveness. The company is also able to achieve higher plane utilisation due to short turnaround time and as mentioned point-to-point routes. travellers can expert and look forward to more frequent and puncture flights. not necessarily the lowest price in the market. d) Higher Frequency of Service Predominantly. c) Reliability AirAsia also chose more consistently secondary and regional airport destinations instead of busy and congested main airports. The ability to provide higher frequency service to justify the smaller capacity of a LCC is another key to AirAsia’s success. However. without the need to load and unload any cargoes.BUS 488 Strategy . which is a very important of the cost leadership strategy. AirAsia reconfigured the seating configurations of its Boeing 737 aircraft to increase seats from 132 to 148 and has thus far operated with only a single-class service. b) Efficiency and Productivity By using a ticket-less online booking system. staff who are properly trained to perform multiple roles as well as aircraft cabins that reduce cleaning time. Generally. AirAsia greatly enhances it operations efficiency and productivity. As a result. Last but not least. Individual Assignment 2 Page 11 of 31 .T01 turnaround time. less busy airports can be expected to provide higher rates of on-time departures. As the lowest cost operator. AirAsia is able to continue to survive in a price war as its low-cost position is a valuable defence against any rivals.
T01 All the success factors mentioned above explain AirAsia’s success. AirAsia also has been particularly effective at implementing the various measures and thus it continues to survive and prosper till today.BUS 488 Strategy . However. it should also be noted that AirAsia’s zealous approach in preaching cost avoidance in every aspect of administration and operations is the key in sustaining a low-cost culture since its operation in 2001. Individual Assignment 2 Page 12 of 31 .
this leads to higher productivity which in turn allows the company the option to expand their operations with the same number of employees and right size its manpower requirement. Investment in kitchens and equipment for storing. in the market. let us discuss how the following strategic actions adopted by AirAsia support its cost leadership strategy.BUS 488 Strategy . No Frills AirAsia’s intense focus on providing air travel with no frills leads to substantial costs saving. heating and serving of meals can be avoided all together. improved productivity means more revenue for AirAsia. Again. Individual Assignment 2 Page 13 of 31 . though not necessarily the lowest price. With this in mind. a) Low Fare. Improved productivity means more revenue for AirAsia. Fuel accounted for almost 50% of the total operating costs and thus it is an important component of cost saving for AirAsia. To achieve this. the strategic actions must thus reduce costs and improve productivity.T01 Question 2 The construct of cost leadership strategy emphasises on lowest costs. Consequently. By operating a single aircraft type allows AirAsia to achieve efficiency in executing its primary and secondary activities. cleaning time and the cost of meals and administration. The new aircraft allow AirAsia to enjoy substantial lower fuel cost as these modern airplanes had lower fuel usage by as much as 12%.5 hours by other airlines. A firm pursuing a cost-leadership strategy needs to gain a competitive advantage primarily by reducing its economic costs below its competitors. The extreme drive to achieve high efficiency in operations allows AirAsia to clock the fastest turnaround time of 25 minutes. This invariably leads to comparatively better productivity as the company was able to utilise its aircraft for an average of 13 hours per day as opposed to 10. b) Investment in Latest Technologies & Efficient Operations AirAsia has heavily invested in purchasing the most modern aircraft A-320s. The absence of in-flight services reduced pre-flight preparations such as the loading of food and drinks.
e) Minimise Personnel Expenses AirAsia implemented flexible work rules and streamlined administrative functions which allowed employees to perform multiple roles. This too helps lower the overall costs. These airports were also less busy and had shorter runways. Similarly. parking and ground handling fees. In short. Individual Assignment 2 Page 14 of 31 . As many secondary airports were older. they were often close to urban areas and were thus more attractive to some travellers. the use of secondary airports can increase sales and help to keep operating costs low. thus helped reduce fuel consumption while aircraft queue for takeoff or taxy on the ground. AirAsia operates out of secondary airports. which were estimated at US$10 per ticket. In view of the airline’s high safety and maintenance standards.T01 c) Low Fixed Costs AirAsia’s ability to acquire low rates for long-term maintenance contracts and aircraft leases led to substantial cost savings. d) Lean Distribution System The use of e-ticketing helps to save the cost of issuing hardcopy tickets. In 2004. f) Use of Secondary Airports Typically. it was reported that AirAsia had the lowest staff-to-per aircraft ratio (106 staff per aircraft as compared to 110 employees per aircraft registered by other low cost carriers) and this helps lower staff cost. The company also saved on agents’ commissions and avoided the need for large and expensive booking and reservation systems. its aircraft maintenance contract costs were also reported to be substantially lower than any other airlines. It was reported that AirAsia’s average contractual lease charge per aircraft decreased by more than 60% from 2001 to 2004.BUS 488 Strategy . which involve lower landing. AirAsia was also able to procure favourable rates on its insurance policies. All these help lower fixed costs. This human resource policy facilitated AirAsia in lowering its personnel costs.
T01 The ability to lower cost and at the same time widen profit margin (through increase productivity) augurs well with AirAsia’s cost leadership strategy.BUS 488 Strategy . Individual Assignment 2 Page 15 of 31 . This inevitably helps AirAsia in its defence against aggressive competitions especially when it comes to price war from strong rivals. This provides AirAsia the options to either lower its prices and gain market share and sales from rivals or keep its prices at present market level and make more profit for every unit sold.
a rapid increase in trade and tourism as well as the respective government investments in their airports. In the late 1990s. For instance. It was noticeable that some Asian countries established open-skies agreements while others allowed the entry of private airlines.BUS 488 Strategy . airlines and travel infrastructure. Also. there was increase privatisation and deregulation of the airline industry in Asia. it can present opportunities for airlines to enlarge their markets. in 1997. However. PESTL Analysis . Of late. a few LLC spouted quickly after Malaysia signed an “open-skies” agreement with the United States. projections by economists had placed Asia at the top of global economy growth charts in the coming years. in reality AirAsia would also have to operate in a more challenging environment with intense competitions. amidst the challenges faced. governments’ intervention and regulation remained substantial. As of 2006. This growth in air travel was also due to the region having geographically dispersed countries with large population.T01 Question 3 The PESTL Analysis and the Porter Model provide an overall analysis of the operating environment that AirAsia competes in.Macro Environment a) Economics Asia’s rapid economic growth and sprouting middle class continues to fuel the growth of air travel in Asia. For instance. the analysis of low cost carriers (LCC) industry reveals that it is so concentrated that intense competition is inevitable. b) Political/ Legal Government policies are important drives for the success of Asia. Although rapid growth and increased trade and businesses may intensify competition (entrance of other LCCs) and even lead to full-service airlines start cut costs to complete. although Thai AirAsia managed to launch its services between Singapore and Individual Assignment 2 Page 16 of 31 . there are still plenty of opportunities for AirAsia to explore and exploit. Hence. it appears that although the travel market will be expanded.
T01 Thailand in 2004 successfully. c) Social-Cultural Surveys revealed that more people were willing to compromise on food and other services in exchange for lower prices. This thus presents another golden opportunity for AirAsia.BUS 488 Strategy . it was stated that price of tickets was the single most important consideration that influenced passengers’ decisions and of course this included without having to compromise on safety and punctuality. Better still. Individual Assignment 2 Page 17 of 31 .5 billion. technology advancements also means having opportunities to reduce operation costs such as savings on commissions for travel agents – AirAsia was the first to do so. The United Nations’ statistics also show that Asia has an astonishing demographic dividend . d) Demographic In 2005. This indirectly means that the increasing large population of the middle age group equates to a larger working age population with more disposable income and thus the likelihood of more business and leisure travels is almost confirmed. the total population in Asia stands at more than 3. In addition. e) Technological New services such as Internet Telephony and the increase in the use of telecommunications services (such as buying air tickets online) provide AirAsia with the opportunity to leverage on new technologies to increase their sales. ecommence and internet-based activities (such as online holiday and hotel reservations) are other areas where AirAsia can derived ancillary revenues from. in some instances. In fact. This presents an opportunity for all LCCs to increase their revenues by offering travelling at a much lower fare. the company still could not expand beyond the SingaporeThailand routes because it could not acquire landing rights elsewhere.where more than 35% of its population is below the age of 25 and more than 55% hovers below the age of 35. In addition. increasingly over the years cost conscious leisure and business passengers were also looking to make their budgets decrease further.
the archipelago geographical structure of Asia made air travel the most viable. Last but not least. the airline industry flew 1. Airline traffic in Asia is projected to grow at 7. buses and cars.1% annually for the next 5 years and more than triple in the next 20 years. since there are several other substitutes such as cruises. amidst these benefits and cost saving.T01 However. However.BUS 488 Strategy . the impact of crisis such as 9/11 (2001) and SARS outbreak (2003) was able to hit the airline industry badly and as such they continue to pose serious threat to airlines. AirAsia must be mindful that system disruption due to heavily reliance on online sales can pose serious threat to the company. As such. of which about 30% were in Asia. AirAsia also needs to be mindful that increase in demand of fuel and limited supply can lead to higher fuel price that decrease yield. Individual Assignment 2 Page 18 of 31 . Given AirAsia’s strong presence in the region. AirAsia needs to be cognisant with the business cycle so that it can to take full advantage of such effects especially when there are changes in discretionary income and consumer spending patterns.Porter’s Five Forces Analysis a) Threat of Substitute Products The possibility threat of substitutes is moderately low.8 billion passengers. Analysis of the Industry In 2004. Analysis of Competitive Forces . this presents vast opportunities to enlarge the company’s market shares. rails. efficient and convenient mode of transportation which is a surplus for AirAsia. The Airline businesses are closely linked to economic activities in Asia and the world.
banks and venture capitalists). suppliers and host communities) and organisational stakeholders (employers and managers).g. c) Power of Suppliers The supplier has an upper hand (high power) due to limited number of suppliers (only Boeing and Airbus). Moreover. d) Threat of New Entrants Threat of new entrants is moderately low as the entry into the industry requires high capital.BUS 488 Strategy . market participants understand and realise that price war is destructive for them and thus they tend to avoid direct price competition to make themselves ‘friendly’ competitors. Nonetheless. the access to the internet also allows customers to have all the information on prices charged by the different LCCs.T01 b) Power of Buyers The power of buyer is high due to almost no switching cost for customers to switch from one LCC to another. Stakeholder Management AirAsia’s stakeholders can be divided into capital market stakeholders (shareholders and major suppliers of capital e. AirAsia’s stellar performance since its establishment in 2001 has brought value to its shareholders since they were receiving positive returns from the day of the company’s inception Individual Assignment 2 Page 19 of 31 . product market stakeholders (primary customers. the industry is also highly regulated since every potential entrant is required to obtain approval from the civil aviation authority of the particular country before the company is allowed to be operated. In addition. e) Intensity of Rivalry Industry rivalry is moderately high due to competition and high exit cost.
with the capability and flexibility provided by above-average returns. AirAsia is able to satisfy multiple stakeholders more easily. it sold more than 20. This helps to attract new customers as well as retain existing ones.000 seats on domestic routes. the company’s key staffs travel regularly to mingle with the host communities so that they understand them better. he/she gets to enjoy highly competitive and attractive remuneration packages. Individual Assignment 2 Page 20 of 31 . In just 3 days of operations. In summary.T01 to recent time 2005.BUS 488 Strategy . although the company operates 737 aircraft that were built by Boeing. For instance. For instance. The company also strives to maintain good relationship with other suppliers that provide aircraft maintenance and airport services. These include productivity and performance-based bonuses. AirAsia enjoyed a compound average growth of 45% for sales and 407% for net income as well as cash flow positive from the time it began its operations. shares and stock options. This speaks well of AirAsia’s ability to meet (or even exceed) the expectations of its customers. All these inevitably increase the value of investments significantly. it also acquired the new A320 aircraft from Airbus. AirAsia satisfies its customers by offering low fares without having to compromise to quality and service. AirAsia also strives to build strong relationship with its suppliers. This has facilitated AirAsia’s aggressive expansion and resounding success in the regional markets – which include Thailand and Indonesian over a short span of time. This probably also explain why AirAsia is able to get lower rates from them. This probably explains why AirAsia has always enjoyed strong support from banks and venture capitalists when the CEO took the company public in November 2004. AirAsia’s joint venture with Shin Corporation to launch its new LLC achieved immediate success. Besides that. As a staff of the AirAsia team. In order to ensure that all specific needs are met. Between 2001 and 2004. the power of these suppliers can be further reduced. In this way the company establishes good relationship with the two and only civil airliner suppliers and hopefully through these good mutual dealings.
T01 Boston Consulting Group (BCG) Matrix The market growth axis correlates with the product life cycle paradigm and predicates the cash requirement a product needs relative to the growth of that market.BUS 488 Strategy . although generally ‘Stars’ are leaders in high growth markets and tend to generate large amounts of cash. if capacity exceeds demand. Diagram 1: BCG Matrix However. Reference to the BCG Matrix appended in Diagram 1. the ferry flight service provided by AirAsia is definitely in the ‘Star’ sector since the company’s business has achieved high growth rate as well as acquired comparatively larger market share. AirAsia must be mindful that they also use a lot of cash because of growth market conditions. AirAsia also needs to be aware that market growth is not the only factor or necessarily the most important factor when assessing the attractiveness of a market as growth markets attract new entrants. Individual Assignment 2 Page 21 of 31 . In addition. For instance. then a particular market may become a low margin one and therefore becomes unattractive.
BUS 488 Strategy . only two LCCs. it generally adopts creativity and yet low-cost advertising so as to keep cost low. AirAsia commonly advertises and promotes through the host country newspapers as well as internet website as they are generally cheap. Like all other LCCs. Diagram 2: Customer Segmentation Competitors Analysis Based on a report about major Asian budget airlines that Airline Business produced. Their tangible and intangible resources are also comparable to that of AirAsia.T01 Marketing & Customer Segmentation Although AirAsia invests aggressively in marketing where required. This means that competition is intense and increasing as new players join in. to keep cost low. Bangkok Airways and Lion Air. With that. AirAsia also positions itself as an airline that provides short-route ferry for non-business and price-conscious business passengers as shown in Diagram 2. Bangkok Airways and Lion Air fall in ‘quadrant I’ and thus are considered as close competitors of AirAsia. based on the competitor analysis framework appended in Diagram 3. Individual Assignment 2 Page 22 of 31 . share almost similar markets as AirAsia in terms of market commonality. For instance.
In contrast. AirAsia will have to compete with Bangkok Airways and Lion Air which have entered the market since 2000/2001.T01 Diagram 3: A Framework of Competitor Analysis Technically. if this happens. As they also adopt the low-cost strategy. This lead to the conclusion that Bangkok Airways and Lion Air modelled in ‘quadrant I’ are direct competitors of AirAsia. these airlines do not directly pose as strong rivalry to AirAsia at this point in time. As such. As of now. any of these companies may consider lowering fare prices to achieve their objectives. Although the ‘attack’ was not successful (MAS eventually lost about 30% of its market share). Individual Assignment 2 Page 23 of 31 . it also reacted to the competition by offering fares at 50% discounts on some its domestic routes. In Malaysia. Although MAS had an ambivalent reaction to AirAsia’s entry into the airline industry. In order to maintain or increase the load factor. AirAsia’s main airline competitor is Malaysia Airlines (MAS) which offers a full range of services. the only way customers can differentiate them from their competitors would be on the airfare charges. However. the profit margin of the remaining players will be compressed and the weak one may be drove out of the market (also known as the vicious cycle). any firm or competitors in ‘quadrant I’ will use their similar resource portfolios to compete against each other.BUS 488 Strategy . the other airlines such as ValueAir and Tiger Airways modelled in ‘quadrant IV’ share few markets although they all possess comparable resources. it proves that any airlines that provide full services can be a threat to AirAsia.
Increasingly cost conscious business passengers also looking to make their travel budgets go further. Larger working age population. Technology advancements provide opportunities to reduce operation costs. Accident. i. System disruption due to heavily reliance on online sales. Entrance of other LCCs. High fuel price decreases yield. Opportunities • • • High growth in the airline traffic presents the opportunity to increase business regionally. there are still many opportunities for AirAsia to explore and exploit so that it continues to lead and be the most profitable LCC in Asia. terrorist attack and disaster that affect customers’ confidence. it is expected that acquisition and merger will happen in the market until equilibrium is reached. Aviation regulation and government policy. However. it can be deduced that the operating environment is moderately competitive and filled with minimum uncertainties – which means that the company has to prepare themselves well during good times. amidst the challenges. Privatisation and deregulation suggests more opportunities to expand market and increase market share. The existence of a large pool of low income passengers who were no longer able to afford or justify air travel on full-service carriers. only a few strong players with sound costcontrolling and profitable business model will exist and succeed.T01 Moving forward. Threats • • Full service airlines start cut costs to compete. Surveys showed a change in people’s preferences. AirAsia can expect to face stiff competition in time to come even though market participants understand that price war is destructive and thus will try to avoid any direct price competition. more people are willing to compromise on food and other services in exchange for lower prices. A short summary on the possible opportunities and threats are appended in the table below. New services such as Internet Telephony provide all LCC with the opportunity to leverage on new technologies to increase sales. From the analysis of AirAsia. • • • • • • • • • Individual Assignment 2 Page 24 of 31 .e. more disposable income.BUS 488 Strategy . In other words. When this takes place.
According to a report by CSS (2005). with no loans and borrowings as of 30 June 2005. the large. in mid-2005. Although terrorism and SARS do impact on air travel. taxes. untapped market and AirAsia’s model would ensure its future success. eight budget airlines were operating in Southeast Asia and there were predictions that there would be as many as 20 such airlines by 2012. For sure. a study by the Centre for AP (2002) confirmed that Asia would continue to offer attractive conditions for the air transportation industry. For example. During the same year. depreciation and amortisation) were among the highest in the world for LCC.BUS 488 Strategy . b) Strong Finance Resource The company has been profitable from the start. a) Conducive Environment for Growth The major macro environment factors suggest a very conducive environment for the growth of low cost carriers (LCC) in Asia.T01 Question 4 AirAsia has been soaring success. Furthermore. the aggressive expansion also resulted in an extensive Southeast Asian regional network of 60 routes. the company had expanded it to 32 by the end of 2005. Starting with two planes bought from a Malaysian conglomerate in late 2001.7 million. As a matter of fact. paint an extremely encouraging demand picture in the long run”. the long run forecast is very positive. it mentioned that in Asia “the demographic fundamentals of large populations that include rising middle classes with increasing leisure time and disposable incomes as well as the lack of competitive forms of transportation. It has a huge bank and cash balances of US$86. there is no other viable and efficient mode of transportation other than to commute by air. It estimated that Asia would account for 30% of the world market by 2020 or one third of growth between now and then. According to TWA (Dec 2003). between East and West Malaysia. Its profit margins of 38% (before interests. it was deduced that Individual Assignment 2 Page 25 of 31 . The archipelago geographical structure of Asia continent is also an important contributing factor to the growth of air transportation.
AirAsia achieved cost per average seat kilometre of 2. depreciation and amortisation) which were among the highest in the world for LLC. cents operating cost per available seat-kilometre. the company was also able to achieve good operating benchmarks in terms of flights on time (88%) and baggage handling efficiency (99. d) Effective in Implementing Cost Reduction Measures Even though most low cost carrier had implemented the various cost reduction measures.05. The ability to ensure that the central objective of achieving bigger cost advantages than the company’s rivals (by continuously Individual Assignment 2 Page 26 of 31 . As a result. a strong finance resource is vital for growth and to wrestle any economic crisis. It operates only one type of aircraft to save on overheads and operating cost. AirAsia does not provide them.BUS 488 Strategy . cents. Unlike other LCC. the lowest for any airline in the world. AirAsia's operating cost is the lowest in the industry. the most important requirement to sustain success in the LCC industry is to possess a genuine low-cost culture. This probably explained why in 2004.S. even though a luggage tag costs less than US$0. At 29 U. c) Obsession with Low Cost Culture In some respects.13 U. taxes. This in turn sustains success. AirAsia preached cost avoidance with religious zeal. it also emphasises cost deduction so intensely that in-flight ovens must not be overheated and that cabin lights switched off at appropriate times. AirAsia crews are also required to help clean the aircraft so as to shorten turnaround times to achieve higher aircraft utilisation. In short. bankers and venture capitalists had provided funds to help the company got listed despite the airline industry was being badly affected by SARS. To further lower cost. it was AirAsia that had implemented them most effectively.T01 AirAsia would continue to be profitable in 2006. In addition.9%). For example. the company was the first to implement taking reservations via the internet rather than through travel agents. With such as an obsession with costs.S. This in turn resulted in further cost reduction as the company paid much lower charges and compensations as compared to other airlines. In addition. This in turn allowed the company to achieve profit margins of 38% (before interests. AirAsia is certainly poised to sustain its success.
AirAsia must develop new ways to manage both customer relationships and suppliers or partners to optimise customer loyalty. e) Effective Marketing AirAsia has been such a big phenomenon in airline industry especially in Asia. In his media appearances. For instance.BUS 488 Strategy . This is a huge victory in any marketing strategies. By using a simple but strong slogan “Now Everyone Can Fly”. it would invest aggressively where required. as he is particularly effective in generating media attention about his airline. supplier relationships. This deal. and revenue.T01 implementing cost reduction measures along its value chain more effectively) allows AirAsia to achieve continual success. AirAsia is certainly well poised to sustain its success. Mr Fernandes. he had never failed to wear a red AirAsia baseball cap. He always takes the opportunities to reinforce AirAsia’s positioning as a small entrant firm battling against giant industry incumbents that offers low airline prices. This helps the company to gain new customers as well as retaining some of its existing clients. its greatest marketing asset is probably the company’s founder and CEO. in order to continue to gain market share and sustain its competitive advantages as a LCC in the high demanding environment. which involved global sponsorship and advertising. was seen as a coup since Manchester United was the biggest and most popular football club in the world. However. AirAsia is also well known for promoting brand awareness without incurring high sale and marketing expenses. in order to widen the company’s media exposure. Moving forward. AirAsia successfully bided and became the major sponsor of football giant Manchester United. However. Individual Assignment 2 Page 27 of 31 . AirAsia has successfully positioned itself in customers’ minds. As the lowest cost operator in Southeast Asia.
. For instance. Intangible Resources .With just 3 years of operations. cleaning time and cost. . .Continued to invest heavily in acquiring more fuel-efficient aircraft so that the company has sufficient capacity to meet the growing needs and demands of their customers while continue to keep costs low.Venture Capitalists and financial institutions provided finances support. it further strengthened relationships. . .A larger span of control. which were estimated at US$10 per ticket. .AirAsia’s net profit ending Jun 2005 was reported US$ 29. . These two measures saved the cost of issuing physical tickets. .AirAsia adopted a modified version of the low-cost airline model in order to keep costs low (or lower) than its rivals. the company’s aircraft cabins were designed to minimise wear and tear.T01 Appendix I Summary of Evaluation Outcome of AirAsia’s Resource Financial Resources Tangible Resources . .AirAsia’s CEO also received numerous many awards in recognition of his ability to make the company successful in a short period of time. .Operated a large fleet of Boeing 737 aircraft . .Organisational was simple and flat. For example.AirAsia reconfigured the seating configurations of their 148-seat Boeing 737-300 aircraft to maximise capacity. and agents’ commissions. The company’s IPO raised US$210 million for the airline and US$42 million for its owners.AirAsia was the first airline in Southeast Asia to utilise e-ticketing and bypass traditional travel agents.Possess huge reserve of US$86. AirAsia is thus capable to generate internal funds as well as afford high demand of debt and equity to finance any expansion. allows AirAsia to focus more intensely on areas like marketing. internet bookings increased from 5% to approximately 50% in August 2004.6 million in mid 2005 and debt-to-asset was merely 0. .AirAsia’s success was widely recognised with a series of awards accorded to the company. .14.Operating a single aircraft type also could lead to substantial cost savings. services and customers. AirAsia was still able to keep its work force motivated and incentivised by providing a remuneration policy that is competitive and attractive.AirAsia tickets could be purchased from post offices and selected ATM machines. the company placed an order for 100 A320 aircraft.In May 2002.All employees were offered a wide range of incentives that include productivity and performance-based bonuses.With a huge reserve and low debt-to-asset ratio.Although the employees were not unionised and the salaries offered by the company were below those of its rivals.BUS 488 Strategy . . many people in the company reporting to one manager which translates to fewer levels of management. and eliminated the need for large and expensive booking and reservation systems. . Organisational Resources Physical Resources Technological Resources Human Resources Innovation Resources Reputational Resources Individual Assignment 2 Page 28 of 31 . A standard configuration has only 132 seats. All these not only helped to incentivise and improve productivity. . a 126% increase yearon-year. .New aircraft would lower fuel usage by about 12%. the AirAsia was listed publicly in November 2004. share offers and stock options.2 million. This helps enhance consistency and reduce costs which augur well with the cost leadership strategy that the company has adopted.
T01 Appendix II Porter’s Five Forces Threat of Substitute Product: MODERATELY LOW Threat of Substitute Products is HIGH when: The differentiation of the substitute product is high Rate of improvement in price-performance relationship of substitute product is high Power of Buyers: HIGH Power of Buyers is HIGH when: Concentration of buyers relative to suppliers is high Switching costs are low Product differentiation of suppliers is low Threat of backward integration by buyers is high Extent of buyer’s profits is low Importance of supplier’s input to quality of buyer’s final product is low Threat of Suppliers: HIGH Power of Suppliers is HIGH when: Concentration of suppliers relative to buyers industry is high Availability of substitute products is low Importance of customer to suppliers is low Differentiation of the supplier’s products and services is high Switching costs of the buyers is high Threat of forward integration by the supplier is high Threat of New Entrants: MODERATELY LOW Threat of New Entrants is HIGH when: Economies of scale are low Product differentiation is low Capital requirements are low Switching costs are low Ease of access to distribution channels is low Cost disadvantages are low Government policies creating barriers are low Individual Assignment 2 High Low High Low High Low High Low Page 29 of 31 .BUS 488 Strategy .
T01 Intensity of Rivalry: MODERATELY HIGH Intensity of Rivalry is HIGH when: Number of competitors is high Industry growth rate is low Fixed costs are high Storage costs are high Product differentiation is low Switching costs are low Exit barriers are high Strategic stakes are high High Low Individual Assignment 2 Page 30 of 31 .BUS 488 Strategy .
and Michael A.BUS 488 Strategy . Nitin Pangarkar. 3rd Edition Individual Assignment 2 Page 31 of 31 . Duane Ireland. Loizos Heracleous – Business Strategy in Asia: A Casebook. Hitt – The Management of Strategy (Concepts) 8th Edition 2) Kulwant Sing.T01 References: 1) R. Hoskisson. Robert E.