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Performance measures to support competitive advantage

http://www.accaglobal.com/en/student/acca-qual-student-journey/qual-resource/accaqualification/p3/technical-articles/performance-measures.html by Graham Morgan 01 Aug 00! "he emergence in the 1##0s of low-cost airlines and the e$pansion of the %uropean tra&el mar'et has shown how competition can significantly affect the structure of an industry. (yanair and easy)et are now well-established and their on-going success will depend upon a continuing ability to attract customers and maintain operational efficiency. "his must be done in the conte$t of increased competition from schedule and charter airlines that now recognise the effecti&eness of the business model adopted by the low-cost carriers. "his article e$amines how the balanced scorecard might be used to maintain the low-cost carriers* competiti&e edge. "he business model adopted by low-cost carriers can be &iewed as ha&ing three broad elements on which success is based: • route networ' de&elopment • brand de&elopment and mar'eting effecti&eness • low-cost operations. "hese aspects can be seen to be structural as they reflect major decisions and de&elopments which set the conte$t for operational performance and day-to-day management. "he route networ' is the product dimension of first importance to customers. +efore %uropean air tra&el was deregulated in the mid-1##0s, the mar'et was neatly di&ided. -chedule carriers focused primarily on business tra&ellers with .!/ of the mar'et, the other !/ being pro&ided by charter airlines as part of the pac'age holiday industry. 0ow-cost carriers use aircraft which for %uropean routes are generally larger than those used by schedule airlines and routes the balanced scorecard must be selected to pro&ide high load factors, ie percentage of a&ailable seats sold. (outes chosen should be new routes or those ser&ed by high-cost carriers, and ha&e appeal to leisure and pri&ate tra&ellers. "his approach allows low-cost carriers to use secondary airports at major %uropean cities or regional airports which pro&ide o&erseas homeowners greater access to properties with minimum tra&el in the destination country. Another major aspect of the route networ' decision is the departure airport. 0ow-cost carriers* use of secondary airports in the 12 pro&ides con&enience to tra&ellers, and important cost sa&ings for the company. Another important factor in the de&elopment of the route networ' is to a&oid direct competition from other low-cost carriers. 3n 00 , of 1 4 low-cost routes, only 1. in&ol&ed the same departure and destination airports - and (yanair and easy)et adopted distinct positions in the mar'et. 5hile (yanair has become the *least-cost pro&ider*, easy)et has positioned itself to ha&e a significant appeal to the

the daily flying time per aircraft is increased significantly. +inggeli and 7ompeo1 ha&e estimated that the cumulati&e cost sa&ings for a lower cost carrier such as (yanair are reflected in the cost per a&ailable seat 'ilometre :A-2. The scorecard approach 3n maintaining the competiti&e position arising from the business model of the low-cost carriers. for (yanair. "hey estimate that in 001. "hirdly. and the direct selling strategies outlined abo&e. with a consequent increase in brand identification. remo&es a cost which is not necessarily &alue-adding to the customer and allows faster turnaround times between flights. "he success of the route networ' strategy is supported by the fact that easy)et carried 11 million passengers in 00<. +rand de&elopment and mar'eting effecti&eness is essential for a product which has a high le&el of mar'et acceptance which is e&idently the case with the low-cost carriers* route networ' strategy outlined already. 7aris.. "he remo&al of the latter from the purchase transaction also pro&ides a significant cost sa&ing since no commission is paid. "here are two major factors which ha&e allowed both (yanair and easy)et to capitalise on product strengths to become leading 12 brand names. "his practice.0/ below those offered by schedule airlines. "he customer deals with (yanair or easy)et and not the tra&el agent. the brand is promoted by the adoption of direct selling to the customer either &ia the telephone or the 3nternet. operating 1!3 routes to << %uropean airports.Performance measures to support competitive advantage business tra&eller by flying three times a day to major cities such as Amsterdam. and 8urich from 0ondon*s 0uton and 9atwic' airports. =irst. (yanair*s brea'e&en load factor is !!/. it is necessary for management to de&elop a set of performance measures which focus on 'ey aspects of performance. which are generally &iewed as more accessible from 0ondon than -tansted :(yanair*s base airport. -econdly.must be boo'ed before -eptember 00>* promotes the company*s central mar'et message in an e$tremely effecti&e manner. statistic. especially when supported by aggressi&e promotional campaigns such as * 00.000 seats at ##p . "hese cost ad&antages in relation to schedule airlines are enhanced by aircraft fleet utilisation decisions. the elimination of free in-flight passenger ser&ices. increased number of seats per aircraft pro&ides a considerable reduction in passenger unit costs. the accepted practice in the industry of discounting prices just before departure dates was re&ersed so that fares are initially low and rise as departure dates approach. "he +alanced -corecard as shown in =igure 1 has been de&eloped to reflect important aspects of the low-cost carrier*s business . particularly catering. 0ower costs and high load factors permit the low-cost carriers to offer fares !0 to . "he balanced scorecard pro&ides a framewor' which can be utilised to de&elop a multidimensional set of performance measures for strategic control of the business. "his strategy is particularly effecti&e since the a&erage price paid per seat is greatly in e$cess of the *loss leader* promotional price and is comparable to that obtained by traditional charter airlines. compared with <. -econdly. 6adrid. =irstly. 0ow-cost operations are in part based on the cost ad&antages of operating from secondary airports. this cost to the top three major schedule airlines was 1 cents :1-. "he final factor pro&iding significant cost sa&ings are crew compensation and utilisation factors based on the higher usage time of aircraft.! cents :1-. ?n this basis.

whose goodwill can often be important in reco&ering *lost* landing and ta'e-off slots. 9round and passenger handling acti&ities. Again. fuel etc in&ol&es the coordination of different parties wor'ing to an agreed timetable. -election of an appropriate set of measures in this area must not lead to any compromise to safety standards or the inappropriate funding of short-term cost sa&ings against long-term lifetime costs of operations. "he fundamental measure in this area must be percentage of flights on schedule with an analysis of delayed flights by reason . @rew management. "he principal measure here. must therefore be *adherence to schedule*. ?ther con&entional measures in an e-commerce world would need to be employed to assess the quality of customer ser&ice. has to balance the need to ha&e bac'-up staff to co&er for unplanned absences and problems arising from flight delays. "he first of these reflects the ongoing understanding of customer demand in terms of new route de&elopment. "he enquiry-to-boo'ing con&ersion rate would be the principal measure with an analysis of potential problem areas.route networ' de&elopment and the management of operational-based relationships. no airline can be successful unless it has an e$cellent safety record and a reputation for punctuality of ser&ice.Performance measures to support competitive advantage model outlined abo&e. "he three abo&e acti&ities will in combination affect punctuality and the relationship with Air "raffic @ontrol. again attempting to classify a&oidable and una&oidable problems. since the direct selling strategy is critical to on-going success. which will depend on the effecti&eness of managing three interconnected areas of acti&ity. luggage. "wo measures could be employed: time period required to build traffic to brea'e&en load factor le&el . policy of the low-cost carrier simplifies these relationships and as such wor' to their ad&antage.distinguishing una&oidable and a&oidable delays. requiring the aircraft to be withdrawn from ser&ice. %ngineering management in&ol&es maintenance and safety wor' on aircraft between flights and the longer-term maintenance. both of pilot and cabin staff. since there is ine&itably a *'noc'-on* effect within a flight timetable. 3n this conte$t. this is a potential pressure point for the low-cost carrier. "he lower le&el of passenger ser&ice and open seat :as opposed to allocated seat. since staff utilisation is more intense than on schedule airlines. "he inno&ation and growth elements must reflect the ability of the business to maintain competiti&e ad&antage. eg response times to information requests &ia the 3nternet/telephone etc. "he high utilisation of aircraft of the low-cost carrier ma'es it &ulnerable to delays. "wo principal areas of inno&ation can be identified . =igure 1: "he balanced scorecard "he business process element of the scorecard is the logical starting point since it must reflect the *do wells* of the business. "he latter will indicate the areas where management action needs to be directed to impro&e performance. loading and unloading of passengers. 6easures must also be de&eloped for customer-company interaction with regard to both the boo'ing and administrati&e aspects of tra&el.

the importance of performance measurement systems has long been recognised. Aonetheless. "he abo&e re&iew of strategic de&elopments within the %uropean airline mar'et and how the balanced scorecard might be used to monitor performance is essentially *a rear-&iew mirror* approach and is limited in this respect. important relationships will ha&e to be de&eloped with handling agents. eg cabin crew costs per A-2. le&els of customer complaints/compensation payments and measure of loyalty in terms of *repeat business* and *switching beha&iour* between other low cost/schedule carriers. ?n this basis. and other re&enue/cost measures analysed in terms of A-2 statistics. eg within 14 months. %$ceptional items such as fuel charge e$cesses might need to be monitored. "he customer perspecti&e measures included customer satisfaction. "he performance measurement system adopted by an organisation is a &ery powerful means of not only e&aluating an e$isting strategy.are dependent on the performance achie&ed in the business processes. ?ther measures would focus on the de&elopment of indi&iduals within the company. since indi&iduals 'now that *what counts is counted*. route flying times. 2ey operational statistics influencing financial performance should be considered. it might be argued that the inno&ation and growth element needs special thought and analysis since the modern world is characterised by persistent change. a 'ey factor in customer satisfaction ratings. 3n e&ol&ing a new route structure. gi&en its potential impact on the profit outcome.Performance measures to support competitive advantage number of routes withdrawn. "he 'ey to success is future-oriented and while certain elements of the scorecard are fundamental to the industry. and to monitor this acti&ity and assess similar initiati&es. ?ther measures might assess the con&enience of tra&el as measured by the a&erage miles tra&elled to 12 airport/from o&erseas airports to destination. and gearing which reflect the financial strength of the company . and inno&ation and growth elements should reflect achie&ements in the mar'et and the effecti&eness of management processes. either by measures of e$penditure on training or success in jobs as measured by internal promotion rates.a 'ey factor in entering long-term contracts for new aeroplanes and for e&aluating the terms within leasing agreements. rating of ser&ice/&alue-for-money. such as load factors. ?ther measures might focus on specific initiati&es which might ha&e profit potential.customer and financial perspecti&es . and time periods to establish effecti&e relationships could be monitored against a standard time period. A major strategic de&elopment for low-cost carriers is their ability to establish *hub-based* businesses abroad :eg in 9ermany. a composite measure of total journey time. but is also useful for de&eloping the mindsets within an organisation which will allow new strategies to be de&eloped on the basis of a coherent analysis of the e$isting . and successful business models ha&e to be re-formulated in line with these changes. "he financial perspecti&e will embrace the high-le&el performance measures such as return on capital employed :(?@%. "hese businesses require fle$ibility in the indi&iduals they employ and this needs to be measured and managed. the 'ey dri&er of success is the strategy adopted and the ability to 'eep ahead of competitors. suppliers in destination airports. eg the sale of targeted in-flight ser&ices beyond those con&entionally pro&ided such as catering and duty-free sales. "he last two elements .

Graham J Morgan is a senior lecturer in strategy and management at The University of Central England . Reference +inggeli. 00 . number <.Performance measures to support competitive advantage strategy and company performance. 0: Byped Bopes for %urope*s 0ow-@ost Airlines. 1 and 7ompeo. "he 6c2insey Cuarterly.