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Ground Handling

Outsourcing, Power and Strategy

Dr Glenn Parry & Kristy Shayler


Agenda

z Background

z Literature
- Strategy
- Outsourcing
- Power

z Findings

z Conclusions

© 2008 Dr G.C. Parry.


www.bath.ac.uk/management/agile
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BACKGROUND
Bath has a long record of aerospace project involvement as well as supplier research in other areas

z Aerospace
- S4T – Through Life Support, national initiative with BAE Systems
- Supply Chain 21; national supplier initiative with UK aerospace
- WEAF & SWRDA projects
- UK Lean Aerospace Initiative
- Lean Flight Initiative; global airlines initiative
- AeIGT; national competitiveness challenge for aerospace
- Lean Xeur; European Lean initiative
- Gold – EU FP7 Proposal; European initiative on through life support for Airbus

z Other supplier and related


- EU FP6 ILIPT 5 Day Car
- UK 3 Day Car
- Agile Construction Initiative

© 2008 Dr G.C. Parry.


www.bath.ac.uk/management/agile
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BACKGROUND
We seek to act as a catalyst for change, transferring leading practice between industrial sectors

I.M.V.P. - MIT’s UK L.A.I. with MIT


International Lean Aerospace
Motor Vehicle Disseminating Initiative
Programme research
ideas & results
to other
industries
3DAYCAR A.C.I. - Agile
5DAYCAR/ILIPT Construction
Programme Initiative

© 2008 Dr G.C. Parry.


www.bath.ac.uk/management/agile
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BACKGROUND
The challenge was set by GHI to explore strategies for profitability within this market

z Maximising Revenue within Short Term Ground Handling Contracts

z Test the Hypothesis:


“Power imbalance between aircraft operators and ground handling staff has made
long term sustainable strategies impossible to employ at Airports ”

z Deliverables
- A review of the literature from the field
- Strategy, Outsourcing and Power regimes
- Primary data from interviews with ground handling companies
- Implications from findings

© 2008 Dr G.C. Parry.


www.bath.ac.uk/management/agile
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Agenda

z Background

z Literature
- Strategy
- Outsourcing
- Power

z Findings

z Conclusions

© 2008 Dr G.C. Parry.


www.bath.ac.uk/management/agile
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LITERATURE-STRATEGY
A company’s strategy must excel in meeting the demands of the future customer market

z Strategy is the management of core competence and identifies where organisations must excel
to maintain leadership (Parry et al., 2006)

z Long-range strategies address present and future need and also future competitive
environmental changes (Parry et al., 2006)

z Technology will dominate the future in services (Harvey et al., 1997)

z Resources give capability; capability is the source of competitive advantage (Grant, 1991)

z Competitive edge is the ability to perform activities better than rivals (McIvor, 1997)

Most companies have wish lists or goals – few have a strategy

© 2008 Dr G.C. Parry.


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LITERATURE-OUTSOURCE
Airlines increasing outsource ground handling operations and handlers may confer competitive
advantage to airlines

z Outsourcing transfers activities to providers with expertise, innovative technologies and


specialised resources to perform activities efficiently (Roehrich, 2008)

z It is one way in which the boundary of an organisation can be adjusted in response to changing
global markets (Parry and Roehrich, 2008)

z It is not resources but processes that create competitive advantage (Penrose, 1959)

z Outsourcing ground handling activities brings many benefits for airlines and can often be a
major determinant of profitability (Yoon and Naadimuthu, 1994)

z Outsourcing decisions are frequently made with little consideration for the long-run
competitiveness of the organisation (McIvor 2000)

© 2008 Dr G.C. Parry.


www.bath.ac.uk/management/agile
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LITERATURE-POWER
All buyer and supplier relationships operate in an environment of relative power

z It can be argued that for High


business to be successful one
party must dominate
Buyer Inter-
Dominance dependence
z The Power Matrix is
constructed around resource Buyer power
characteristics relative to
supplier
- Relative utility
- Relative scarcity

z Dominance is the favoured Supplier


position as it confers Independence
Dominance
advantage in negotiation

Low
Low Supplier power High
relative to Buyer
Source: Cox et al. 2000

© 2008 Dr G.C. Parry.


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Agenda

z Purpose

z Background

z Findings

z Conclusions

© 2008 Dr G.C. Parry.


www.bath.ac.uk/management/agile
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FINDINGS
Using a questionnaire to gather data we have interviewed a number of ground handling companies
from around the world

z We have four research questions


- Are current strategies short or long term?
- Is there a power imbalance between aircraft operators and ground handlers?
- What are the core competences of ground handlers?
- Is the market attractive?

z Primary data from interviews with directors and senior management


- 22 ground handling companies interviewed
- 19 different countries
- 4 continents
- Company size from employing 500 – 22,000 staff
- 2007 revenue from $26,000 - $2.5bn

© 2008 Dr G.C. Parry.


www.bath.ac.uk/management/agile
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FINDINGS
The contracts outsourced are mostly up to 3 years, with service quality being the main competitive
leverage

How long are contracts? What is your differentiator?

Short NA
None
(up to 1yr) 5%
Mid 5%
9% Size
(up to 3yr) Price
43%
Equipment

Staff
Open
24% Quality &
Reputation

Service
Level

Long (>3yrs) Yes


24% 90%

Do you have a What is your


differentiator? differentiator?

© 2008 Dr G.C. Parry.


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FINDINGS
We found that the airlines were dominant in most negotiations, giving rise to a number of impacts

Who holds the relational power? What impact does it have?

Reduced Closures
Eithe r profit 5%
Ha ndle r 5% Quality 9%
Decline Reduced
0% turn time
9%
5%
Increased
liability No Impact
Impact 9% 18%

73%

N/A
Airline 9%
95% Other
36%

Airline dominance results in ground handling being viewed as a commodity,


competing fundamentally on cost and with little chance of changing SLAs
© 2008 Dr G.C. Parry.
www.bath.ac.uk/management/agile
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FINDINGS
A number of key problems that face the industry were identified

40%

Percentage
cited
20%

0%
Airline Level of Regulations and Economy Investment cost Labour
bargaining competition licences of equipment
power

82% of interviewees said this is not an attractive market, with almost half citing
profitability as the major concern
© 2008 Dr G.C. Parry.
www.bath.ac.uk/management/agile
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FINDINGS
Our findings show that, strategically, this is a difficult market

z It is difficult to differentiate the company based on assets, even though these are
long term high capital investments
“There is no equipment specific to a customer's requirements…..we have 50/50 lease owner
ship” (CEO)
“We have made significant long term investments in facilities and equipment…”
(General Manager)

z Fortunately customer loyalty appears high, though this could be due to limited
competition and buyer inertia
“…Almost all our contracts have been renewed…” (VP, International Development)

z Despite the requirement for long term investment, price remains the key
differentiator for suppliers
“I would like contracts based on service quality as opposed to price.” (Senior Executive)
“..price is the only factor which determines which ground handling company the airline will
choose..” (Managing Director)

© 2008 Dr G.C. Parry.


www.bath.ac.uk/management/agile
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CONCLUSIONS
The ground handling market, as we have come to understand it, has various constraints and
supports

Constraints
Market Cost Relationship
Market Transactional buyer-
Liberalisation supplier relationship
High level of Increasing fuel Buyer dominance
substitution costs
High level of Investment costs Adversarial arms
competition length buyer
relationship

Ground Ground
Airport handling Ground Handlers handling Airline
license services (buyer)

Low industry Leverage factors


attractiveness such as service
(supports quality and cost
incumbents) leadership Longer contract
Success factors High level of length facilitates
provided by core services outsourced investment (but not
competence by airlines power)

Supports
© 2008 Dr G.C. Parry.
www.bath.ac.uk/management/agile
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FINDINGS
Generic strategies are limited in this market

Generic
Cost leadership Differentiation Focus
strategies

8
Ability to cut price in Customer loyalty can Focusing develops
Entry barriers retaliation deters deter potential core competencies
potential entrants entrants that act as entry

8 8
barrier

Ability to offer lower Few substitutes so Buyers have less


Buyer power price to powerful buyers buyers power to power because of few
negotiate reduced alternatives

Supplier power

8
Better insulated from
powerful suppliers

8 8
Better able to pass
price increases to
customers
Low volume ensures
supplier power

8
Can use low price to Customers used to Specialised product
Threat of defend against differentiated and core competency
substitutes substitutes attributes, reducing protect against
threat of substitutes substitutes

8
Better able to compete Brand loyalty ensures Rivals cannot meet
Rivalry
on price customer loyalty differentiated-focused
customer needs
© 2008 Dr G.C. Parry.
www.bath.ac.uk/management/agile
Source: Adapted from Porter 1998
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FINDINGS
Flagging up possible approaches

Employ long-term
sustainable
strategies

Maximise revenue
in the ground Strategy and Actions
handling industry

Increase supplier
power

© 2008 Dr G.C. Parry.


www.bath.ac.uk/management/agile
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FINDINGS
To maximize revenue, we have identified a number of possible strategies to help with the power
imbalance

z Increase reputation and brand value through networking and global presence

z Gain a wide customer portfolio to increase global reputation

z Offer a full range of ground handling services to increase the likeliness of


becoming a sole supplier

Increase z Purchase specialist equipment e.g. technology


supplier - increases buyer dependency
power - increases buyer switching costs

z Focus on customer value


- strong customer relations
- value adding services

z Create specialism and non standardisation of supply by innovating when the


opportunity arises

© 2008 Dr G.C. Parry.


www.bath.ac.uk/management/agile
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FINDINGS
We have identified a number of possible long term sustainability strategies

z Senior managers should identify and build core competencies, with inputs from
lower levels of the organisation (McIvor, 1997).

z Seek opportunity for market closure through merger and acquisition (Cox, 1999)

z Agree details of the service level agreement simultaneously to negotiating the


ground handling contract price
Long-term
z Lock-in buyers with long term contracts (Cox, 2001a)
sustainable
strategies
z Lease owned equipment to gain additional revenue

z Maintain organisational flexibility through both long term and short term
investment and flexible staffing capabilities

z Invest in IT, training and competent staff to facilitate efficient quality service
delivery

© 2008 Dr G.C. Parry.


www.bath.ac.uk/management/agile
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Agenda

z Purpose

z Background
- outsourcing
- strategy
- power

z Findings

z Conclusions

© 2008 Dr G.C. Parry.


www.bath.ac.uk/management/agile
20
CONCLUSIONS
Conclusions

z The power imbalance in the industry proves to be a major barrier to profitability

z Despite efforts of ground handling firms to decrease commoditisation there has been little gain
of supplier power

z To maximise revenue, we have identified a number of possible strategies to help with the power
imbalance and long term sustainability

z Increasing your capability, size and global reach would appear the most promising approach to
increased profitability

© 2008 Dr G.C. Parry.


www.bath.ac.uk/management/agile
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CONCLUSION

You can look at the future ideas for the integrated


product supply chain from the automotive industry

z A detailed account of the requirements for a 5-day


car is presented the BTO book
- Market need and challenge
- Product strategy
- Supplier integration

z 28 authors from 12 different ILIPT partner


organisations from across Europe

z Available on Amazon: ISBN 978-1-84800-224-1

Dr G.C.Parry
Senior Research Fellow
School of Management
University of Bath
Bath BA2 7AY
email g.c.parry@bath.ac.uk
Tel: 01225 383883
© 2008 Dr G.C. Parry.
www.bath.ac.uk/management/agile
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References

z Cox, A., Sanderson, J. and Watson, G. (2000). Power Regimes. Helpston: Earlsgate Press

z McIvor, R.T., Humphreys, P.K., McAleer, W.E. (1997). A strategic formulation for an effective make or buy
decision. Management decisions, 35 (2), pp.169-178.

z McIvor, R. (2000). A practical framework for understanding the outsourcing process. Supply chain management:
An international journal, 5 (1), pp. 22-36.

z Penrose, E. (1959). The Theory of the Growth of the Firm. London: Basil Blackwell.

z Parry, G. and Roehrich, J.K. (2008). Towards strategic outsourcing of core competencies in the automotive
industry: Threat or opportunity? Int. J. Automotive technology and Management. (awaiting press)

z Parry, G. (2006). The threat to core competence posed by developing closer supply chain relationships, Int. J.
Logistics, 9 (3), pp. 295-305

z Porter, M.E. (1998). Competitive Strategy. New York: Free Press.

z Roehrich, J.K. (2008). Outsourcing: management and practise within the automotive industry, in Parry, G.
Graves, A.P. Eds. (2008) Build to order: the road to a 5-day car, Singer, Verlag.

z Yoon, K.P. and Naadimuthu, G. (1994), A make-or-buy decision analysis involving imprecise data. International
Journal of Operations & Production Management, 14 (2), pp. 62-9.

© 2008 Dr G.C. Parry.


www.bath.ac.uk/management/agile
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Disclaimer

This document was produced by researchers from the University of Bath School of Management.

This document and the information contained herein is for the use of members of GHI Conference
2008 only. Members should reference the University of Bath School of Management whenever any
information is used or disclosed relating to this work or any other by the School of Management,
University of Bath.

It may not be copied, used or disclosed to none-members in whole or in part except with the prior
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document and all applicable portions of the copyright notice must be clearly referenced. The
document is supplied without liability for errors and omissions.

All rights reserved. This document may change without notice.

© 2008 Dr G.C. Parry.


www.bath.ac.uk/management/agile
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