Assignment One

Task (One)
1) Cost Leadership Strategy Definition
Companies that choose a cost leadership strategy offer relatively standardized products with features or
characteristics that are acceptable to customers. In other words, with a minimum level of differentiation
and also at the lowest competitive price. This means that companies offer standardized to an industrys
typical customer. Customers receive value when a company successfully implements a cost leadership
strategy.
Companies that wish to be successful by following a cost leadership strategy must maintain constant efforts
aimed at lowering their costs which relative to competitors cost and creating value for customers. Cost
reduction strategies include:

Building an efficient scale facilities

Establishing tight control of production and overhead costs

Minimizing the costs of sales. Product research and development, and service.

Investing in state of the art manufacturing technologies.

In simply, cost leadership strategy is a type of competitive strategy with which the organization
aggressively seeks efficient facilities, cuts costs, and employs tight cost controls to be more efficient than
competitors.
Undercut competitors prices and still offer comparable quality and earn a reasonable profit. Successful
strategy to defend against the five competitive forces. Such protected from powerful customers and
suppliers, because customers cannot find lower prices elsewhere, and other buyer or potential new entrants
occur, surely get more market share. Also acts as a barrier against new entrants and products.

2) Porters Competitive Forces and Strategies

Porter M. E. proposed that business-level strategies are the result of five competitive forces in the
companys environment.
Five Competitive Forces:
a)

Potential new entrants

Companies successfully following cost leadership strategies generally must produce and sell in
large volumes to earn above- average returns. And, with a continuous focus on efficiency and
reduce the costs, low cost leadership companies creates barriers to entry.
New entrant must either enter the industry at large scale or to be satisfied with average profits until
they move sufficiently far down the experience curve to match the efficiencies of the low cost
leader. For example, capital requirements and economies of scale are main two potential barriers.
Internet technology reduces barriers to entry.
However, they also have its disadvantages side. If an incumbent firm is a cost leader, the new
entrants may have to invest heavily to reduce their costs prior to entry. Often, new entrants will
enter using another business strategy rather than attempting to compete on costs.

b)

Bargaining power of buyer

Achieving the low cost position provides some protection against powerful customers who attempt
to drive down prices. If customers attempt to drive prices below the cost of the nest most efficient
company, that company might choose to exit the market rather than remain and earn below average
profits, leaving the low cost with a monopoly position. If that happens, customers would lose any
bargaining power, as Monopoly Company would be in a position to raise prices.
For example, the internet provides a wide array of information about product, which makes
customers become empowered customers with increasing bargaining power. Internet shifts greater
power to end consumers. Cost leadership can also reduce the threat of buyers. Powerful buyers are
a threat to firms when they insist on low prices or higher quality and service from their suppliers.
As opposed to, lower prices threaten firm revenues. Higher quality can increase a firm's costs. Cost
leaders can have their revenues reduced by buyer threats and still earn normal or above-normal
profits. These firms can also absorb the greater costs of increased quality or service and may still
have a cost advantage over their competition.
c)

Bargain power of supplier

Because they have achieved the lowest cost position in the industry, the cost leadership strategy
enables a company to absorb a greater amount of cost increases from powerful suppliers before it
must raise prices charged to customers. This may enable the company to be alone among its
competitors in earning above average returns. In addition, a low cost leader that also has a dominant

market share may be in position to force suppliers to lower prices or to hold down the level of price
increases, and thus reduce the power of suppliers.

For example, procurement over the web tends to give a company greater power over supplier, but
the web also gives suppliers access to a greater number of customers, as well as the ability to reach
end users. Overall, the Internet trends to raise the bargaining power of suppliers.

Suppliers can become a threat to a firm by charging higher prices and reducing the quality of the
goods and services they supply. However, when a supplier sells to a cost leader, that firm has
greater flexibility in absorbing higher-cost suppliers than does a high-cost firm. Higher supply costs
may destroy any above-normal profits for high-cost firms but still allow a cost-leader firm to earn
an above-normal profit.

d)

Threat of substitute products

The low cost leader is in a more attractive position relative to substitute products than are other
companies in the industry. To retain customers, the low cost leader can more easily reduce prices to
maintain the price value relationship and retain customers. For example, internet creates new
substitution threats. For example, traditional travel agencies have been hurt by the offering of lowcost airline tickets over the Internet.

e)

Rivalry among competitors

Achieving the lowest cost position means that a companys competitors will hesitate to compete on
the basis of price because, in the event of a price war, the low cost company will continue to earn
profits after its competitors compete away their profits.
Thus, for example, by cost and product differentiation, whilst also with the levelling force of the
Internet and information technology, it has become more difficult for many companies to find ways
to distinguish themselves from their competitors, so rivalry has intensified.
In relate with their disadvantages, this threat also can be reduced through two choices of pricing
strategies. First, the cost-leader can set its price equal to the price of higher-cost competitors.
However, by doing this, it will reduces the chance that competitors that imitate the low-cost firm.
Because of, keeping prices equal to a competitor's prices does sacrifice market share and sales
volume. Thus in result, the cost-leader firm earns an above-normal profit at this competitive price.

Second, the low-cost firm can price its goods or services below the prices of its high-cost rivals.
The lower price of the low-cost firm will attract numerous customers and increase its market share
and sales volume but the cost is a lower profit earned. This strategy sends a signal to competitors
that lower costs are possible. Such a signal may motivate competitors to try to reduce theirs costs.

3) The Foundation of Air Asia Company

Asia believes in the no-frills, hassle-free, low fare business concept and feels that keeping costs low
requires high efficiency in every part of the business. Through the corporate philosophy of Now Everyone
Can Fly, Air Asia sparked a revolution in air travel with more and more people around the region choose
Air Asia.
In the competitive airline industry, Air Asia keeps improving their supportive and constructive
management by being supportive and responsive in listening to its employee for any ideas for reducing
cost. And as their philosophy Everyone Can Fly Air Asia its weapon to corner its other competitor is
effect in reducing cost boosted Air Asia to be one of the top in low cost air carrier competition.
Air Asia is leading the way for developing low cost airlines and its promises to revolutionize the
international market place. And for now, many low cost airline companies in some country have adopted
the strategies innovated by Air Asia successfully

Regarding on that, Air Asia Company believe by through on their excellent regional passenger base, high
levels of service quality and committed customer relationships would leaves them well positioned to
continue to deliver cost savings and growth significantly to the Air Asia whilst increased profitability.
However, attaining low costs requires high efficiency in every part of the business and maintaining
simplicity. Therefore Air Asia had incorporated best industry practices in every process system, which
through the implementation of the following key strategies:
Safety First
Safety is the single most important criterion in an area that Air Asia will never compromise
on. Air Asia had complied with the conditions set by regulators in all the countries where the
airline operates. Others than that, Air Asia had also partners with the worlds most renowned
maintenance providers to ensure that theirs fleet is always in the best condition.

The power of supplier is high due to the airplane manufacturers only Boeing and Airbus. In addition,
the switching cost for the Boeing and Airbus is pretty low because it can sell same standards to
another airline. However, to make up an airplane needs high technique and specialist so it is rarely
possible for Air Asia to extend and integrate their operation into supplier part.

High Aircraft Utilization

In relates with this term, Air Asias high frequency flights have made it more convenient for guests
to travel. Air Asia as the fastest in the region, had implements as a quick turnaround of 25 minutes.
This has resulted for Air Asia in high aircraft utilisation, lower costs and greater airline and staff
productivity, whilst enable them to gain more profits through removed frills service and removed
chair booking and extensive crew drilling on performing quick turnaround.

Air Asia had replaced their aging Boeing B737 aircraft with the Airbus A320 aircraft in Thailand
and Indonesia. This was led to an all Airbus fleet provides them with an opportunity to stamp their
dominance as the ASEAN airline throughout the Air Asia Group by the end of 2010.
In addition, with also their unmatched network connectivity, frequency and full-fledged Airbus
operation along with their low cost operations and low-fare model, so Air Asia will enjoy a
substantial edge over competitors around them.

Low Fare, No Frills

Air Asia targets guests who are prepared to do away with frills such as meals, frequent flyer miles or
airport lounges in exchange for fares lower than those currently offered without comprising on
quality and service. For example, the guests of Air Asia have the choice of buying exclusively
prepared meals, snacks and drinks from their in-flight service at an affordable price.
Air Asia put emphasis on lowering all avoidable costs to sustain low fares and remain profitable,
even on low yields. What Air Asia do is cut the cost of operating the flights on their chosen routes
by flying to and from airports that offer cheaper take-off and landing fees. Besides, Air Asia end free
meals and drinks during flights as travellers do not expect excellent service. Also, Air Asia does not
allocate specific seats to passengers and there is only one class.
Streamlined Operations

One of the key for Air Asias success was made by the process as simple as possible. Air Asia was
worked towards a single aircraft fleet, this actually greatly reduced duplicating manpower
requirements as well as stocking of maintenance parts.

The area is vast, the cultures diverse, the economies vibrant and the travel links well, thats where
Air Asia spotted the opportunity. Some are innovative ideas inspired by the talented people of Air
Asia and some are simple but functional moves that came from other sources.

Lean Distribution System

Air Asia offers a wide and innovative range of distribution channels to make booking and travelling
easier for its guests. Air Asias ticket-less service provides a low cost alternative to their overall
guest in issued printed tickets.

Point to Point Network

The LCC model adopts the simple point-to-point network. In Air Asia, their flights are short haul
(four-hour flight radius or less), whilst their sister airline Air Asia X focuses more on the medium to
long haul flights (more than four-hour flight radius). The underlying business is to fly a person from
point A to B.

4) Air Asias Value

Air Asias Vision

To be the largest low cost airline in Asia and serving the 3 billion people who are currently
underserved with poor connectivity and high fares.

Air Asias Mission

To be the best company to work for whereby employees are treated as part of a big family.

Create a globally recognized ASEAN brand.

To attain the lowest cost so that everyone can fly with Air Asia.

Maintain the highest quality product, embracing technology to reduce cost and enhance
service levels.

Air

Asia

builds

and

sustains

its

competitive

advantage

by

providing

services

at

price that is simply lower than competitors price. Operation effectiveness and outstanding efficiency are
two main characteristics of low cost businesses including Air Asia.

5)

Air Asia Financial Analysis

Counting the profit from operation, Air Asia gained 281,432,000 RM, an increase of 217.63% from 2008
data. After deducted with depreciation and all taxes, the company experienced 25.96% increased of profit
after tax in 2009 compared to 2008 data. Based on its impressive growth of financial performance, we can
see that Air Asia has implemented the correct business model to win the competition within the industry.

6) Value Chain Analysis

The central objective is to achieve bigger cost advantages than the rivals by continuously searching areas
for cost reduction along its value chain. By further analysed Air Asias value chain, one can actually
determine how Air Asia creates low cost advantages along its value chain. These cost advantages constitute
Air Asias order winner in competing with its rivals as they enable Air Asia to provide the lowest possible
price to the price sensitive customers.

In LCC industry, cost is the competitive priority and it determines market position. The goal of these
activities (Inbound logistics, Operations, Outbound logistics, Marketing and Sales, and Service) is to create
value that exceeds the cost of providing the product or services, thus generating a profit margin.

Margin

Support

Human Resource Management

Activities

Technology Development

Service

Marketing & Sales

Outbound Logistics

Operators

Margin

Informal Logistic

Procurement
Infrasructure

Primary Activities
The value chain analysis describes the activities the organization performs and links them to the
organizations competitive position. It evaluates the value in each particular activity added to the
organizations products or services. The performance of Air Asia could be evaluated by valued chain
model.
a) Inbound Logistics
It involves all the activities required to receive, store, and inputs for producing outputs. Air Asia, by having
a single, their standard aircraft model throughout the whole fleet to helps them reduced their overall
inventory costs, delivers greater productivity, and increases fuel efficiency.
In additional, all the aircraft can share to use the same tool, spare parts and same skilled manpower for
maintenance and repair purpose. This will help to reduce the stock of part maintenance, less training for
employee and servicing cost. Ultimately through replaced with Airbus A320, Air Asia was overcome the
increase of oil price by structurally reduce cost and enhance customer services with better quality aircraft.
These Airbus A320 are ultra modern, more fuel efficient and environmentally friendly aircraft with
unparalleled levels of passenger comfort, serviceability and reliability. Air Asia has received positive

feedback that their passengers love this aircraft. These aircraft have reduced operational cost significantly
and helped to deliver strong profits.
b) Operations
It processes inputs to create valuable products and services. Air Asia was stringent about standards and
procedures, but maintains a generous degree of humour. Air Asia realizes that keeping the passenger safe is
of paramount importance.
Air Asia has once again emerged as market leader in the airline industry. The low fares airline came up
tops on the Boeing's list for having the best utilization and dispatch reliability amongst players in the airline
industry. What this means is that Air Asia successful in operating more flights out of its aircraft schedule
and on time for all theirs departures.
Besides, Air Asia conducts line checks at transits, night-stops, and "A" checks, low level maintenance
checks that are conducted once a month. Department of Civil Aviation Malaysia also appreciate the high
maintenance standards of Air Asia. Superior quality comes with the aesthetics and every cabin crew
demonstrates skill and talent in carried out their tasks efficiently. Air Asia pilots practice standard
applications, technical and behavioral tests, ground school training, safety and emergency procedural
training.
c) Outbound Logistics
It involves delivering the product and service into the distribution channel and then to the final consumer.
Air Asia currently operates 13 aircraft on a 12 aircraft schedule. Air Asia's aircraft interior was outfitted
with signature red carpeting and plush leather seats to enable its guests to travelled comfortably. Penang
and Singapore to our previous international routes to Kuala Lumpur, Kota Kinabalu and Bangkok.2009
was a very challenging year for Indonesia Air Asia. Great efforts were successfully made to refocus the
business from mostly domestic to mostly international routes.
d) Marketing and Sales
The excellent utilization of IT have directly contributed to their promotional activities, brand building
exercise as well keep the cost low by enabling direct purchase of tickets by consumer thus saving on airline
agent fees. The power of buyer is moderately high due to almost no switching cost for customers.
Customers can compare each airline by the Internet so the information about the price and service is quite
clearly.

Furthermore, the other system that Air Asia implemented is customer reservation system (CRS). It is an
integrated web-based reservation and inventory system. It includes Internet, call center, airport departure
control and more. It is a direct sales engine that effectively eliminates the travel agents and the sales
commissions that need to be paid to them.

By using this system, Air Asia can reduce the cost and eliminates the travel agents and the sales
commission to pay them. After that, this system are very customer friendly because the entire customer if
want to buy or make a reservation a ticket directly via online, and no need to come to the ticket counter. In
conclusion, by using this system effectively, efficiency, customer satisfaction, fast and secure in buying a
ticket already met. It means the lowest cost can possibly achieve.
Their main ancillary driver is Baggage Supersize, excess baggage and cargo. Air Asia also launched Air
Asia-CIMB Savers Account and Air Asia Courier to add to their already big ancillary drivers such as Air
AsiaGo.com, Air Asia Insure, Air Asia Caf, Pick a Seat, Air Asia Megastore, in-flight merchandise and
much more. In additional, Air Asia K-Bank Credit Card by Thailand Air Asia and Karsikornbank provide
overall guests in offered more privileged when flying with Air Asia Thailand
e) Service
Air Asias one of the few airlines that has the shortest turnaround time. It operates with a 25 minutes
turnaround time, hence allowing them benefit from more flights a day. Air Asia also provided shuttle bus
service for customer between main airport and secondary airport. Air Asia learnt a lot from their
passengers feedback. Air Asia believe that being transparent can encourage itself to maintain a high
quality service for all passengers.
They provided the fastest in-flight services in the region. Within 25 minutes, new carts loaded with food,
beverages and high-quality merchandise are efficiently stowed on their aircraft, ready for sale after takeoff. .In addition, with the Citibank Air Asia Credit Card, Air Asia provided points which are redeemable
for Air Asia flights. Card members will also enjoy priority booking during promotional campaigns.
Frequent services are needed in order to justify the smaller capacity. Such high frequency of service can
also attract business travellers since they can catch the connecting flights on time without waste their time.

7) SWOT Analysis( Strengths and Opportunities)

SWOT analysis that Air Asia have is on of the major component to make Air Asia more strength in their
business and can make they are able to compete with the same low cost carrier airline industry.

a) Strengths
Air Asia has a very strong management team with strong links with governments and airline
industry leaders.
This is partly contributed by the diverse background of the executive management teams that consists of
industry experts and ex-top government officials..T he strong links with the government and airline
industry leaders is one of the strength of Air Asia Company.
For example, Shin holds a 50% stake in Thai Air Asia. This has helped Air Asia to open up and capture a
sizeable market in Thailand. And also, with their strong working relationship with Airbus, they managed to
get big discount for aircraft purchase which is also more fuel efficient compared to Boeing 737 planes
which is being used by many other airlines
The management team is also very good in strategy formulation and execution.
The strategy that they have formulated at the beginnings was a clever blend of proven strategies by other
low cost airlines is US and Europe. They are operational strategy, such as no frills, landing in secondary
airport), people strategy and branding strategy which was linked with other service providers like hotels,
car rental).
Air Asias brand name is well established in Asia Pacific.
Besides the normal print media advertising and promotions, Air Asias top management also capitalized on
promotions through news by being very media friendly and freely sharing the latest information on Air
Asia as well as the airline industry. Their partnership with other service providers such as hotels and
hostels, car rental firms, Citibank (Air Asia Citibank card) has created a very unique image among
travellers.
Air Asias local presence in few countries such as Indonesia and Thailand has successfully elevated the
brand to become a regional brand beyond just Malaysia. The links with Manchester United and AT&T
Williams Formula One team have further boosted their image to a greater extend beyond just the this
region
Air Asia is the low cost leader in Asia
With the help of Air Asia Academy, Air Asia has successfully created a low-cost airline mentality
among their workforce. The workforce is very flexible and high committed and very critical in making Air
Asia the lowest cost airline in Asia.

The excellent utilization of IT

The excellent utilization of IT have directly contributed to their promotional activities, brand building
exercise as well keep the cost low by enabling direct purchase of tickets by consumer thus saving on airline
agent fees

b) Opportunities
There are 2 major events that are taking place now or going to take place in less than 6 months from now.
Oil Price
First, is the ever-increasing oil price. The increasing oil price at the first glance may appear like a threat for
Air Asia. But being a low cost leader, Air Asia an upper hand because its cost will be still the lowest
among all the regional airlines. Thus, Air Asia has a great opportunity to capture some of the existing
customers of full service and other low cost airlines customers. However, there will be also some
reduction in overall travel especially by casual or budget travelers.
ASEAN
Second, is the ASEAN Open Skies allows unlimited flights among ASEANs regional air carriers
beginning December 2008. This will definitely increase the competition among the regional airlines.
However, with the first mover advantage as well as its strengths in management, strategy formulation,
strategy execution, strong brand and low-cost culture among its workforce, this agreement can be seen as
more of an opportunity.

8) Significant Resources
Highly skilled employees
They were the source of all capabilities that Air Asia possessed. The experience and knowledge which they
had were hard to imitate by other competitor.
Capabilities on Reduce Cost
These were the competitive weapon that would be used by AA to corner other competitor. Their effect in
reducing cost boosted AA to be one of the top in low cost air carrier competition.

9)

Cost Effectiveness

Efficiency

Reliability

Higher frequency of service

Cost Effectiveness
Air Asia put emphasis on lowering all avoidable costs to sustain low fares and remain profitable, even on
low yields. What Air Asia do is cut the cost of operating the flights on their chosen routes by flying to and
from airports that offer cheaper take-off and landing fees. Besides, Air Asia end free meals and drinks
during flights as travelers do not expect excellent service. Also, Air Asia does not allocate specific seats to
passengers and there is only one class.
Efficiency
Using a ticket-less online booking system and telephone booking systems, Air Asia can save the travel
agents commissions. Selected airports are generally close to large or international airports. Besides, the Air
Asia strives to offer a very simple product, for example by just offering one-way tickets, without any
frequent flyer points or rebates.
Reliability
Air Asia chooses secondary and regional airport destinations instead of a congested main airport.
Generally, less busy airports can be expected to provide higher rates of on- time departures, shorter
turnaround times. Besides, without the need to load and unload cargo, the turnaround time of an aircraft
was reduced from 30 to 25 minutes hence allowing the airline to benefit from more flights a day.
Higher frequency of service
In general, Air Asia offers point-to-point flights on short-haul routes. Higher plane utilization is resulted
from short turnaround time and point-to-point routes. Air Asia normally flies more often than other full
service carrier Air Asia has once again emerged as market leader in the airline industry and possesses all
the critical success factors that we have identified.
The low fares airline came up tops on the Boeing's list for having the best utilization and dispatch
reliability amongst players in the airline industry. What this means is that Air Asia is successful in
operating more flights out of its aircraft schedule and is on time for all its departures.

Conclusion

Air Asia (AA) has exposed us an insightful example in showing how a keen and critical strategic
movement may drive a company that was almost bankrupt back into shape. While Air Asia management
was provided a suitable business environment, its employees demonstrated a highly productive and
efficient performance in running the business and reducing cost.
Air Asia decision on using uniform aircraft also put into account. It emphasized the principle of economies
of scale and also it will eventually reduce learning curve.

Undoubtedly, the Airbus replacement

programme is the biggest contributor to Air Asia Company's strong performance. The superior operating
economics and reliability of the Airbus A320 aircraft has elevated their customer service delivery to a
higher level and the aircraft is proven popular among their guests in Air Asia.
As the number of Airbus A320 aircraft in fleet increases, Air Asia had gained that opportunity in continue
to achieve greater reduction for their operational costs and further extend their competitive edge. However,
Air Asia actual main strength was based in its innovative ways to keep the cost low which was hard to
imitate. With those entire factors combined together, we can seen Air Asia develop competitive advantage
that brought Air Asia to be the contender as market leader in the competition.

10)

Is strategy of Air Asia sustainable

These were the product of AA employees creativity. All the capability that Air Asia possessed required
high skill from its conductor. Without sufficient knowledge, it will only give small benefit to Air Asia on
low cost industry.
Once the strategic positioning and direction have been defined, then we are going to view this
sustainability of Air Asia in providing a company providing a platform for future growth and to execute
current strategy. A position will be more sustainable the more it forces potential imitators to be inconsistent
with their own current image or reputation, activities or coordination and control mechanism

These inconsistencies will deter the

potential
imitator
from
matching
particular levels of quality and cost

Analyze processes and infrastructure

Air Asia build up their competitive advantage form providing customer lowest price and omit the
unnecessary service. For example, Air Asia install kiosks to speed up check-in. With those innovations, it
truly making aviation become more convenient. The customers and the operations are around Asia. Air
Asia use IT to connect and integrate those end-to-end support processes.
Evaluate people and partners
As a member of the AirAsia Team have highly competitive and attractive
compensation packages. In order to provide customer excellent service, AirAsia
arrange a series of training course to their in-house flight attendant. The training
courses include awareness on safety standards, aviation terminology, in flight
service procedures, product knowledge and so on.
AirAsia chose many kinds of field partners as their complementors. Their
partnership can divide into two main kinds: direct partners and indirect partners.
Direct partners have strong relationship with the airline, for example, hotels,
travel agencies and so on. And indirect partner included Facebook, Twitter,

REFERENCES
Strategic Management, Raphael Amit, Professor at Wharton University of
Pennsylvania,US
Strategy formulation and implementation:

Tasks of the General Manager, by Arthur A.

Thompson, Jr & A.J. Strickland III, 1992

Air Asia (2005). Corporate Web Site. Retrieved on April 10, 2005, from
http://www.airasia.com/