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I hereby confirm that the assignment submitted herein is my own original work. Signature of Student: For office use only: Date scanned and returned to student: _________________________________ REGENT Business School

Carmen Savva

Date: 30 August 2011


QUESTION 1.1 Describe the PEST factors effecting BA between the years 1995 2000 1.2 As a change consultant, what change interventions would you have implemented to mitigate against the effect of the economic factors? 2.1 The vision of Robert Ayling is an example of a vision gone wrong. Drawing from the theory of the characteristics of a vision, provide possible reasons why this vision was not successful. 2.2 Can you design your own vision for BA for the period in question, which is different from Robert Ayling? Justify your answer. 3.1 Robert Ayling introduced a raft of changes that were extremely unpopular with staff. Analyse the causes of staff resistance to his initiatives. 3.2 Describe the steps you would have taken in introducing the same changes in order to obtain minimal resistance to his initiatives. 4.1 Why is it important for a manager to understand his / her organisations environment? 4.2 Refer to the sub-heading Strategy in the case study and analyse BAs strategy under the dimensions: domain sought, strategic thrusts, differential advantages and the results expected. Bibliography 20 17 15 13 11 9 8 6 PAGE 3


1.1 Introduction: PEST is an acronym for the environmental scanning process of the external environment the variables and factors outside the firm that can impact on the overall performance of the company.PEST refers to the Political, Economic, Socio-cultural and Technological factors within the environment in which the company performs.

Political Environment (Legal): BA is the flag (Union Jack) carrier airline of the United Kingdom. Once the most profitable Western Airline, the gradual deregulation of the industry resulted in increased competition particularly in the low-cost sector. The US UK open skies agreement placed pressure on BA who agreed to release some of their regular routes to American carriers as part of their alliance with American Airways. In 1996 Robert Ayling, the CEO of BA proposed a virtual merger with American Airlines to pool flights, resources and revenues. This proposal was blocked by the Europe Competition Commissioner in an attempt to maintain a competitive balance. In pursuit of their global strategy BA formed the OneWorld Alliance with Canadian Airlines, Cathay Pacific and Quantas Airlines in 1998. The ongoing political conflict between countries could result in higher security and insurance costs to combat the risk of terrorism. Obtaining immunity from antitrust legislation from the US Government would be a good competitive advantage for BA.

Economic Environment: The net profit of BA peaked during 1995 but declined rapidly resulting in a net loss by March 2000. This occurred despite various cost saving initiatives.


Various factors affected the profitability of BA. Financial: o The strong pound, high inflation rate, general recessions and overcapacity reduced the demand for air travel; o The rising fuel price increased prices and lowered demand; o The exposure to the Yen loan and the weak dollar revenues had an adverse effect; o Due to the Asian economic crisis the demand for flights in this region decreased.

Wages: o The increased staff compliment resulted in a high salary bill, placing pressure on margins; o BA attempted to reduce labour costs by recruiting newly hired employees at lower salaries to replace existing staff; o Strike action cost the company millions and affected employee morale.

Competition and alliances: o The gradual deregulation resulted in an increased number of carriers; o BA formed the OneWorld alliance to compete more effectively with their rival Star Alliance.

Market capitalisation and Share prices: o BAs market capitalisation dropped from 7.6 billion to 3.2 billion; o The share value dropped by almost 50% between May 1998 and January 1999; o Return on Capital reduced from a staggering 8.04% in 1991 to 0.05% in 1999.


Socio-cultural environment: BA received negative publicity following the dirty tricks court case lost against Virgin Airlines adversely affected their public image. The press focussed on their strained staff relations resulting in a significant loss in clientele who went elsewhere. According to Newton (2000) air travel has a major impact on the environment and BA formed the Sustainable Business Unit with the aim of integrating environmental and social issues into business decisions. The focus areas included: noise; emissions and fuel efficiency; waste, water and materials; congestion; tourism and conservation. Newton also refers to the re-launched Code of Conduct during 2000 addressing people relationships; a fair deal for customers; impact on employment, working conditions and human rights; Citizenship to partner with the communities in which they work and not at their expense.

Technological environment: BA has to keep track of technological developments in the field of e-commerce and aircraft manufacturing in order to maintain their competitive advantage. The implementation of the smaller Boeing 777s on a reorganised route aimed to focus on their identified market niche and reduce unnecessary capacity over a period. A key issue would be the extent to which technological advancement such as the use of internet for online ticket sales is implemented. Cost synergies from industry consolidation (eg. virtual merger) can offset upward pressure on prices and costs.


1.2 Introduction: In 1996 Robert Ayling was appointed as CEO of BA. Things started deteriorating despite the fact that he continued with many programs implemented successfully by his predecessors. He had a sound vision and strategy for the company being that of long-term growth by maximising profit, reducing costs and focussing on high profit market segments. BAs Chairman Marshall implied that Ayling was not the right man to execute it. A change agent could facilitate some changes to help deal more effectively with the economic challenges facing BA. It is not easy to implement changes and they are often met with resistance by staff.

Leadership: Ayling had a directive leadership style and followed a top-down approach. He didnt have the support of the staff and the deteriorating service was a direct reflection of the decrease in staff morale. A Change Management Consultant should work with Ayling to improve communication and adopt a more participating management style. Alternatively a recommendation should be made to the Board to have him replaced by a person more suited to that leadership style.

Workforce: Many new competitors emerged using pricing strategies to gain market share. BA reacted by sourcing new alliances and reducing labour costs by recruiting new staff at a lower salary to replace existing staff. Remuneration packages were restructured and staff felt cheated and insecure. Ayling focussed on cost saving, growth and profit but neglected to consider how the staff felt resulting in a lot of resistance and the costly strike.


Lewins model of change: Change in an organisation occurs in three stages namely unfreezing, movement and refreezing. Unfreezing: Ayling implemented downsizing of the workforce in an attempt to restructure the organisation and reduce the number of staff. There were fewer hierarchical levels and managers had more autonomy to make decisions which could lead to improved operational efficiency. The focus moved to marketing and customer service. According to Goodstein and Burke (1991:4-17) BA introduced training programs such as Putting People First and Managing People First to help line workers and managers to understand the nature of the airline industry services. Movement: BA must develop tactics and programs to filter Aylings vision throughout the company right down to lower level employees. Some internal systems need to be addressed such as the communication in general as well as training policies to educate staff to gain their support. Bonus systems could also be implemented to motivate them. Focus on recruitment and placement of suitable staff that will fit in to what BA want to achieve. Refreezing Stage: It is easy for staff to regress and fall back into old ways. Staff should be incentivised for exceptional client service and innovative ideas to re-enforce this new behaviour and support the culture. The above changes will lead to improved client service and will in conjunction with a thorough marketing strategy attract the passengers back to BA. Increased passenger numbers will result in higher turnover and improved profits. Most economic indicators within the control of BA will improve if the staff morale and customer service is addressed. Staff commitment to quality service and cost control is as important as focussing on growth. Employees can play a vital role in generating cost saving ideas and adjust their actions to be more cost effective and efficient. 7|Page

2.1. Long-term growth by maximising profit, reducing costs and focussing on high profit market segments. Bob Ayling, CEO of BA between 1996 and 2000 had great strategies and ideas for change. He said: We cannot afford to stand still. We have to maintain our lead through even greater innovation, so we offer outstanding products and a quality of service that people will alter their travel plans to enjoy.(CAP Online: BAs new identity). The manner in which he tried to achieve these objectives did not enjoy the support of those around him inevitably leading to failure. In 1997 BA launched a new corporate identity, involving a 6 billion A clear vision will assist in

improvement programme and a new strategic direction. differentiating BA from its competitors.

A vision can only become a reality through action. Without the enthusiasm, buy in and support of his staff, the vision of BA was merely a platitude and statement of the obvious. A successful vision is dependent on tactics and programs being implemented to bring the vision of the top management level to the bottom line employees throughout the organisation. The vision defines the boundaries of the organisation. At BA the employees did not share Aylings vision as what he wanted to achieve and how he wanted to achieve it was never clearly communicated to them. An effective vision will help employees to understand the bigger picture, create an understanding and build commitment towards the achievement of a super ordinate goal. A vision statement has the potential to motivate employees. Under Aylings tenure at BA this was not the case as he had an authoritative, impersonal leadership style with little regard for how the staff felt. Judging by the success of his predecessors, a more participative management style would have suited the organisational culture better. The insensitive top down approach followed by Ayling antagonised his employees. The downsizing policy was one sided and not implemented with compassion.


2.2 Every person important, every interaction a moment of magic, every year better. The above vision statement would be ideal for BA during the 1995 2000 period. A vision must tell a story and have the power to motivate the staff. Every person includes all stakeholders such as staff, customers, suppliers and shareholders. Everybody is important and contributes to the success of the company. Every interaction refers to all activities between internal parties as well as external parties. The activity the person is busy with should be what they are focussing on. Strive to make this moment memorable. Every year better refers to the company financial results in terms of market share and profitability. If a company is successful, this is often passed on to the staff via increases and bonuses. Staff will also have a sense of security being associated with a successful company. The airline industry is a service industry and only the customer service together with the pricing strategy could differentiate BA from the many competitors. It is about customer retention in a very competitive market. Staff have the sole responsibility for customer service. Client service is a core value built into any business in the service industry. If implemented correctly, this vision could produce change in employee attitudes enhancing the purpose of the Putting people first campaign launched by BA. This vision is uncomplicated and could pull the entire organisation in the desired direction of growing the business. The vision reflects the aspiration of all stakeholders: Employees most people have an inherent need to be appreciated and recognised and therefore employees will strive to render the best possible service to the customer. Nothing must be too much. Employees must strive to create the moment of magic for every person that they deal with. Customer a customer enjoys the experience of being treated like the most important person in the world. During the exchange, he / she should receive the undivided attention of the employee. 9|Page

Shareholders - a happy customer will come back and often also tell friends and family about the service received and this could lead to increased passenger levels.

The vision proposed above can have a positive effect on all key performance areas of BA. Human Resources: Staff will be working in a positive environment and strive to excel at service delivery. Success in this area could result in lower absenteeism and fewer resignations. Staff are generally more productive when they enjoy their job and this could have an effect on the operational costs of the company as they would work smarter and focus on cost saving initiatives. Client Services: Clients tend to be loyal to companies where they have a pleasant experience and they feel that they are getting value for their money. These clients will return resulting in customer retention if not growth. Financial Impact: This is the most important aspect as it is the reason that most companies exist. A stable workforce and returning customers is what is needed to ensure success in this market. The proposed vision is emotionally inspiring and easy to commit to. It should become part of the companys day-to-day activities and culture.

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3.1 Introduction: According to Kotter and Cohen (2002): Organizations change when their people change. The changes proposed and implemented by Robert Ayling were not unrealistic and had been carried out with great success by his predecessor, Lord Marshall. Despite the Business Efficiency Program introduced by Ayling, whereby the company was saving millions due to cost saving initiatives, the financial position of the company continued to deteriorate. Robert Ayling had no regard for any of the important interventions required to reduce the resistance to change. Some of the causes of the resistance to the proposed changes demonstrated by staff include: Education and communication: Staff must be aware of the reasoning behind and implications of the proposed changes. They must understand why it is happening and what is expected of them. Participation: Employees should be involved in identifying the problem as well as be empowered to propose some solutions. Facilitation and support: Supervisors and other role players should help employees to come to terms with the proposed changes and guide them with the necessary adaption in attitudes and behaviour that will support the end goal. Low level supervisors who are in touch with ground level staff are often the best people to communicate and facilitate change. Negotiations: Discussions between all role players should occur to ensure that everybody understands the situation and are on board to ensure the success of the implementation. Security: There were many structural changes at BA that were not communicated to the staff. Staff were insecure about their jobs as the management team had been streamlined and it was evident that Ayling was attempting to cut overheads. As salary costs are one of the greatest expenses for a company it is an obvious deduction to make that they could be next. The policy of restructuring, pay-freezes, job cuts and

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out-sourcing threatened the livelihood of the staff reducing staff morale and commitment. Economic factors: Staff would have been aware of the economic downturn facing the country, as well as the increased competition in the airline industry. Fear of the unknown: Ayling went out of his way to get the message across that the new BA overhaul was a top-down process. He had a high-level streamlining

approach with little regard as to how it affected staff. This left staff in the dark. Selective information processing: Not much official communication came down from Ayling. The grapevine played a huge role and staff often received inaccurate information, out of context, leading to incorrect deductions being made. The staff had no trust in Aylings leadership. He had a strong financial focus on restoring the profitability of the company. He paid no attention to providing what the customer wanted, ensuring that the routes offered fit the market in the price and offering and lost a lot of customers to competitors. The declining staff morale lead to strikes and further loss in clientele due to poor service. Ayling should have taken the time to explain the challenges facing the company to all staff. This communication should have been open and candid leaving staff with the clear understanding of why there would be some retrenchments and changes to overall operations in terms of routes and changes in the fleet. Staff could have been empowered to make informed decisions regarding their careers and taken ownership of the problem. The

employee opinion survey proved that people were proud to work for the company and therefore would probably have gone the extra mile to get the company through these difficult times. There was no communication, so they were not on board and were detached.

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3.2. To effect the changes proposed by Ayling a different approach could have been taken. Continue building on the successful corporate culture that was in place during the reign of Lord Marshall, whose customer service and training focus had a feel good approach. Remain focussed on financial controls and strengthen relationships with employees, creditors and suppliers. Take steps to improve performance by creating various incentive schemes to motivate staff, control costs and increase earnings by focussing on lucrative routes and eliminating less profitable flights. The focus cant just be on cost cutting initiatives. Staff, marketing, the actual product offered as well as customer service are all focus areas. Concentrate on improved service such as on time departures and arrivals, baggage security and staff going the extra mile for customers so that people would want to fly BA. Amend the relationship with travel agents and re-establish fair commissions so that they could actively market BA again. The initiative of using various world images on the tail of the aircrafts could have been implemented with great success given the fact that 80% of the BA passengers were foreign travellers. A marketing campaign actively positioning BA as an international player in the airline industry should have been launched. This is an initiative that all Europeans could have been very proud of if the correct message was conveyed. Their National asset could have conveyed the visual message that we are global. Open and honest feedback to the staff regarding the financial challenges facing the company in an attempt to get the staff to have a clear understanding of the reasoning behind what was happening. Strive to get staff to understand the situation and gain their trust so that

everybody could work together as a team to get the company through these tough times. Employees should be equipped and empowered to take initiative and responsibility to perform their jobs effectively. Performance incentives would be payable to all staff because in the words of Gordon Bethune (1999) everyone in the company is like part of a watch. All parts need to work together.... He also places emphasis on teamwork, keeping open lines of communication, promoting

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predictability and using measurement to help guide management since what gets measured is what gets managed. (Gordon Bethune, chairman and CEO of Continental Airlines).

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4.1. Introduction: The organisation and the environment in which it operates are interdependent. Organisations require resources from the environment in which they function. The business environment refers to both the internal and the external factors that impact on the operations of the organisation. According to Cronje, Du Toit, Marais and Motlala (2003: 87) there are three distinct environments. Micro environment:

Variables such as corporate goals, functions of management and the resources of the company are under the direct control of the management and make up the micro environment. Managers must be abreast of changes and continually adapt to ensure they align themselves with the changing environment and remain competitive.

Market environment:

This environment is encountered directly outside the organisation and determines the nature and strength of the competition.

Managers must understand their market. Who their customers are and what they want. They must always be one step ahead of their competitors. They must know who their competitors are and be aware of any potential new entrants to ensure that they position themselves well.

They should focus on relationships with suppliers and intermediaries thereby ensuring they always get the best deal and are regarded as the airline of choice.

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Macro environment:

There are six distinct sub environments within the macro-environment. (Cronje et al p 87). Technological environment which continuously brings change and innovations; Economic environment where inflation, exchange rates, recession and monetary and fiscal policy play a role; Social environment includes consumer lifestyle, habits and values. This is the market served and preferences and demands must be catered for to ensure survival; Physical environment refers to the infrastructure around the company (transportation roads, airports, harbours etc.) as well as natural resources including minerals, fauna and flora; Institutional environment with the government and its political and legislative involvement as its main component; International environment where local and foreign politics affect the business environment as well as the market environment.

These all have an impact on the management of a company but are not under the control of management. A SWOT analysis can be used to isolate key issues and facilitate a strategic approach to dealing with them. It assists in identifying internal Strengths and Weaknesses. It also helps an organisation to identify opportunities and counteracting threats in the external environment. The PEST analysis where the Political (Legal), Economic, Socio-cultural and Technological environment are analysed and the impact thereof is planned for is also helpful when making decisions as all of these factors could have an influence on the success of the company.

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4.2 Introduction: The aviation industry is gradually evolving. The industry is in serious need of restructuring and consolidation so that airlines can remain competitive and sustainable. Domain sought: Robert Ayling wanted to differentiate BA from other carriers, including low-cost, no frills carriers, by focussing on the high profit niche market segments such as intercontinental routes and premium passengers in business and first class. Business travellers tend to be more demanding than leisure travellers who are generally not too pressured for time. Costa (2002: 89) stated that trying to appeal to widely different customer needs runs counter to the overall trend in service industries, in which distinctive approaches, tailored to different customers, have generally come to dominate. Strategic thrust: Ayling reduced investment in local economy seats as the rising no frills airlines placed pressure on these prices reducing the profitability in this market. Between 1997 and 2000 BA planned to introduce 43 new aircrafts and announced a modified premium travel strategy. They planned to use smaller planes on reorganised routes that would cut capacity by 12% over three years. Their intention was to cut costs and maximise the number of club and first class travellers, who were generally willing to pay a premium ensuring increased passenger yields. BA also ensured that they employed the right people and invested in their training to enhance customer service, striving to make the flight as effortless and pleasant as possible. There

was a focus on improving convenience by increasing their online bookings from the less than 1%.

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BA has a large network and strongly unionised workforces resulting in many challenges. Merger possibilities were limited by competition regulation. The ability of international expansion is hindered by foreign ownership restrictions. According to Buckley (2002)

foreigners cannot own more than 49% of a national airline in Europe. Differential advantages: BA implemented numerous innovative ideas to set it apart from its competitors in the industry. The focus was on the quality of the products offered with the view that these differentiated value added services that customers preferred could be provided at premium prices. Some of these initiatives include their Airport lounges where passengers have access to drinks, internet and upmarket bathroom facilities including showers to freshen up in the arrival lounges. Ayling introduced a number of customer focused schemes aimed at improved customer service. To differentiate the brand he initiated the Sustainable Business Unit focussing on the impact of aviation on the environment. This campaign appeals to customers who feel that BA is acting responsibly by looking after the world we live in. BA enhanced their in-flight comforts to distinguish between full-fare business travellers and others preferring to fly on discounted fares. BA was the first airline to offer a completely flat bed in business class on long haul routes. In certain classes in flight entertainment is delivered by personal video screens and audio channels verses overhead screens in other classes. Food quality, leg room and the inclination of the seats distinguished premium passengers from low fare passengers. BA could provide for various niche markets on the same flight improving economies of scale. This approach ensured that they could increase their market share by catering for the different demands of travellers. Expected results: The differentiated product and service approach ensures customer satisfaction through a sustainable competitive advantage. BA focussed on the value that could generate a

comparatively higher price and improved margins. Specific markets were targeted focussing on diversified needs potentially generating a higher than average price.

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Innovations necessitate additional costs that are offset by the additional revenue generated by sales. Ensure that the changes in the network and the fleet do not increase operating costs.

Word count: 4 067

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