GLOBAL STRATEGY AND LEADERSHIP CASE ANALYSIS EXAMPLE CPA PROGRAM SEMESTER 1 2016 INTRODUCTION Following is a short case titled Blue sky man which is an article from the CPA Australia publication INTHEBLACK from 2010. This case was used as a case in a previous GSL exam. We will use this case as an example of how to apply the steps and questions/points from the Case Analysis Guidelines for each topic to analyse this case as though we were preparing for the exam. CPA Australia Ltd 2015
BLUE SKY MAN Airlines have had a tough decade. First there was the September 11 attack in 2001, then came the SARS outbreak in 2003, followed by soaring fuel prices in 2004. And to top it off, the global financial crisis exploded in 2008, with the number of premium air passengers falling by 25 per cent as a result. But there is a light at the end of the tunnel for budget airlines, that is. Known in the aviation industry as lowcost carriers, their nofrills approach has seen them thrive while olderstyle, fullservice airlines have taken some heavy blows. In the same week that budget upstart Tiger Airlines announced its initial public offering, Japan Airlines, Asia s oldest fullservice airline, declared bankruptcy. Around the same time, Australia s Jetstar and Malaysiabased AirAsia announced the first alliance between two lowcost carriers. Jetstar, the successful offshoot of Qantas, has experienced record growth since its launch in 2004. Last October, CEO Bruce Buchanan predicted that passenger revenue will increase to A$2.6 billion in the 12 months to 30 June 2010, from around A$2.3 billion in the previous year. Meanwhile, AirAsia voted best lowcost airline in the world in last year s prestigious Skytrax awards dominates in the SouthEast Asian market. Analysts have called the alliance a killer proposition, where hundreds of millions of dollars will be saved through the joint purchase of aircraft and the sharing of ground operations and aircraft parts. Jetstar and AirAsia are the two largest lowcost airlines (in revenue terms) in the Asia Pacific. Together they earned nearly A$3 billion in 2009. CEO Bruce Buchanan says: Jetstar is the number one in terms of revenue and RPKs [revenue passenger kilometres] and AirAsia s the number one in terms of passengers. Our longhaul network s a lot bigger. But we are both very profitable and growing much faster than the competition. Having two budget carriers dominating a market is nothing new: Ryanair and Flybe dominate Europe, while Southwest and JetBlue are the major players in North America. We see Asia as deregulating and see a strong opportunity there just like when North America and Europe deregulated, we will see a similar sort of explosion in services and opportunity in SouthEast Asia, predicts Buchanan. And there are signs that this market is starting to open up. Recently, the lucrative Kuala Lumpur to Singapore route was liberated after decades of protectionism. Professor Murali Chandrashekaran from the Australian School of Business researches the airline industry, most recently concentrating on customer satisfaction in the US market. I think the [Jetstar/AirAsia] alliance is going to make a meaningful difference. The Asian market is really growing compared with the stagnant markets in North America and Europe, he says. The alliance can make big cost savings by sharing the ground staff and operations. The way for lowcost carriers to save costs is to get the plane in and out of the gate as fast as possible. Cost is a key dynamic in the relationship, explains Buchanan. The virtuous circle for our business is: lower costs lead to lower fares, which generates more passengers travelling, which leads to lower costs. If you can provide something in that business model that actually provides a stepchange, you can provide a stepchange in growth as well. Page 2 of 9
Since the Jetstar/AirAsia alliance was formally announced on 6 January this year, work has progressed to developing cooperative arrangements for passenger handling at overlapping airports in Australia and Asia. The first procurement tender for engineering is in the works and the alliance partners have started discussions with the aircraft manufacturers on appropriate aircraft design for lowcost carriers where the routes cover large distances over water. Influencing aircraft design has traditionally been the domain of the fullservice carriers as it s been seen as a valuable way to drive their product proposition. Now lowcost carriers are getting in on the act. If you can influence the aircraft design you can make quite an impact on the economics of the business. Once the design is set it drives a lot of the constraints in the business, including the way you operate your turnaround times and passenger density on an aircraft. A whole raft of things is set, including fuel efficiency and engineering requirements, Buchanan explains. Jetstar and AirAsia already run the same aircraft type, and while this was a key factor in the moves towards an alliance, it certainly wasn t the only consideration. We looked at every other carrier in the region. AirAsia is the one that gets close to Jetstar in terms of growth rate, scale or size or business model profitability. Underpinning that was also a very similar structure in terms of the specifications of both businesses. We both have very similar business models, but also culturally we are very similar as well, says Jetstar s CEO. For Buchanan, culture is critical. If you don t have a culture focused on driving costs out and airfares down as well as looking for growth, it s very hard to get alignment on joint projects, because you just come at it from such different perspectives. When you look at alliances involving fullservice carriers they are focused on revenue opportunities. We looked at those opportunities but they introduce complexity into the business and that adds costs. We thought the first lowcost carrier alliance should focus on taking out costs. It should be an operational alliance where we share ideas, synergy, procurement, specifications and assets. These are lowhanging fruit, they are easy for us to go after, he says. AirAsia and Jetstar share a similar heritage and the major players know each other well. Conor McCarthy, Ryanair s head of operations in the 1990s, helped start Jetstar. He is also a shareholder and board director of AirAsia. AirAsia s CEO and founder, the ebullient accountant turned entrepreneur Tony Fernandes, has known former Qantas CEO Geoff Dixon and current incumbent Alan Joyce for many years. But there s no full equity merger in the wings; both sides say the partnership is purely operational. The airline industry is very complex in terms of crossborder ownership laws and Asia s not at a North American or European stage in terms of a common single market, says Buchanan. Rather than waiting for governments and other parties to create a market environment that would allow that, we just want to get on and seek the opportunities that are accessible at the moment. Source: J. Blondell (2010), Blue sky man (extract), INTHEBLACK, April, pp. 26 30. Page 3 of 9
ANALYSIS OF BLUE SKY MAN From the Case Analysis Guidelines, the key steps in case analysis are 1. Read the case to get a broad understanding of the issues that are being considered. 2. Consider the key topics of the case and the aspects of the GSL material that are applicable to the case. 3. Analyse the case for each topic area identified, using the models, concepts and principles related to each topic from the Study Guide After reading the case to get a broad understanding of the issues being covered, the next step is to consider the key topics of the case and the aspects of the GSL material that are applicable. The Blue Sky Man case is relatively short and so does not cover all topics. The key information in the case has been considered, and a number of relevant tools and models have been selected to illustrate an example of how this case could be analysed. Note that the analysis is not exhaustive and you may apply additional models or tools in your analysis. An example of how this case may be analysed is shown below. Module 2 Understanding the External Environment The industry could be identified as the airline industry or this could be narrowed down to the lowcost airline industry. This analysis is based on the lowcost airline industry. To determine if the industry is global we would consider whether the airlines operate globally or in a domestic market only. Jetstar and AirAsia operate international flights so would be considered to be in the global industry. There is not enough information in this case to make any inferences about the industry value chain. The key service segments in the industry relate to the different types of carriers lowcost and full service (including premium). The industry would be considered to be in the mature stage of the industry lifecycle. This can be determined because during this stage o Buyers start to have greater power buyers have alternative choices and are easily able to compare price due to the availability of information on the internet. o Focus is on efficiency, cost control and market segmentation focus of Jetstar and AirAsia on cost reductions through new aircraft design to creates fuel efficiencies, and savings through sharing of ground operations and aircraft parts and joint purchase of aircraft. o Industry rivalry is intensified and some companies may consolidate through mergers alliance between Jetstar and AirAsia creates efficiencies for both airlines due to savings through sharing of ground operations and aircraft parts and joint purchase of aircraft. Page 4 of 9
Analysis of forces using PESTEL Factor Discussion Point Impact Political The shift from protectionism to deregulation of the Asian market, for example the Kuala Lumpur to Singapore route. + Economic Societal Technological Soaring fuel prices have resulted in the airline industry having to endure a tough operating environment in recent times. The global financial crisis in 2008 resulted in a 25% drop in premium air travel. Full service airlines have taken some heavy blows due to the growth of lowcost carriers; for example, Japan Airlines being declared bankrupt. One of the key macro elements driving growth in the industry (and the alliance) is the strong growth in consumer demand for budget or low cost air travel. Customers have easier access to information about airfares and are able to easily select the product that suits their needs and price range. The airline industry has had a tough decade following the September 11, 2001 terrorist attack, the SARS outbreak in 2003 and the GFC. Developments in aircraft design for lowcost carriers wanting to cover long haul routes over water. Improvements in fuel efficiency, engineering requirements, and turnaround times at the airport. + + + Environmental Information has not been provided in the case about any environmental issues. N/A Legal Overall Complex cross border laws constraining market opportunities. On the basis of this analysis, the future growth of the lowcost airline industry could be expected to increase in comparison to the fullservice airline industry. Key factors promoting future growth are as follows : Strong growth in demand for low cost airfares Deregulation of the Asian market Developments in aircraft design and fuel efficiency reduced costs to be passed on to travelers Page 5 of 9
From the case facts, you could draw some conclusions using Porter s Five Forces model, such as (you would include case facts to support these conclusions) o Rivalry in the industry is high due to price competitiveness and the number of operators in the industry. o Power of buyers is also high as buyers have alternative choices and are easily able to compare price due to the availability of information on the internet. o Threat of new entrants is low due to high entry costs. o Power of suppliers is likely to be medium to achieve their strategy the airlines need to be able to gain cost efficiencies through the joint purchase of aircraft and sharing of ground operations and aircraft parts. This indicates that the price of these products is high and there would be a limited number of suppliers for each. o Threat of substitutes is low substitute would be premium air travel which is likely to be more expensive. For domestic travel some customers may consider travel by bus or train as an appropriate substitute. Organisations in the industry are likely to face intense competition in the future, based on price. The ability to control costs so as to be able to offer fares at the lowest possible price will be a key factor in an organisation s profitability and future success. The basis of competition in the industry has changed in recent years and customers are moving towards a preference for lowcost travel options over fullservice providers. Sustainable competitive advantage will be achieved by those airlines that can drive down airfares to attract more customers. Cost reduction to allow these lower fares is key. The key success factors include cost economies through appropriate aircraft design, sharing of ground operations and aircraft parts and focusing on markets where there is growing demand such as Asia. Module 3 Understanding the Internal Environment Travelers expect low fares and safe and efficient flights. Employees expect good work conditions and ongoing employment. Understanding key stakeholders: o Step 1: Identify stakeholders lowcost travelers (external), suppliers (external), board members (internal), shareholders (internal) and employees (internal). o Step 2: Alignment of stakeholder needs strategy of the business is to be a lowcost airline and to grow the lowcost airline business across Asia the strategy aligns overall with the needs of stakeholders (except competitors) travelers want low cost fares shareholders and board want high profits suppliers want ongoing business have an interest in the success of the business as do all stakeholders (except competitors) competitors want to take market share away but they have an interest in the industry being successful so the alignment between competitors and the alliance is at an industry level Page 6 of 9
employees want ongoing employment security their interest in the organisation s success but also in the industry continuing at its current size or growing otherwise if their job alternatives in the industry will be limited o Step 3: Assess stakeholder groups Employees are subjects because they have low power but have a high level of interest. Lowcost travelers are context setters because of a high degree of power but lower interest. The Board of Directors and shareholders are players because they have high interest and high power as a result of the influence they can exert in strategic decisions. o Step 4: Understand the impact and influence of stakeholder groups Subjects (employees) would need to be consulted/provided information about the organisation s strategy. The organisation should partner with the players (the Board and the shareholders) in developing objectives and strategy. The organisation gives the context setters (travelers) information so they are aware of any changes and manage their expectations in terms of the service changes. Strategic drivers o Industry and markets the geographic market is the Asia Pacific. o Customers the only customer group is lowcost travelers. o Products/services the only service is flights. The organisations and the alliance have a cost focus the generic strategy is low cost in the Asia Pacfic market segment. The strategy is to focus on a lowcost, no frills service and to build on their alliance because both organisations have a similar business model, strategy and culture. The strategy of Jetstar and AirAsia to form an alliance focused on low cost airfares aligns to the capabilities of the organisations in the alliance, as both already operate in this area and also their fleets have similarities. Both have a culture focused on cost reduction which allows them to offer lower airfares and this gives them a competitive advantage in the current external environment. This strategy has worked when compared to other organisations in the global airline industry who have suffered with premium air passengers falling by 25 percent. This is evidenced also by Japan Airlines, Asia s oldest fullservice airline, declaring bankruptcy. The focus of alliances of fullservice carriers is revenue opportunities which add complexity and cost. Page 7 of 9
SWOT Analysis This SWOT Analysis has been prepared for the Jetstar AirAsia alliance. Strengths Alliance allows hundreds of millions of dollars of savings through joint purchase of aircraft, sharing of ground operations and aircraft parts. Weaknesses Focus on lowcost could mean when economic conditions change, customers may change preference to full or premium services. Strategy aligns with current customer preferences. Market leaders with AirAsia voted best lowcost airline in the world and dominates SE Asian market. Alliance structure requires that both organisations can continue to work together and continue to agree on strategy. Opportunities Work with aircraft manufacturers in developing aircraft design for lowcost carriers wanting to cover long haul routes over water. New markets opening up in Asia due to deregulation. Threats Other operators already operating in the lowcost segment in other markets may join the Asian market. Future economic uncertainty. Once strategy and aircraft designs etc are finalised and successfully implemented in the Asian market, they can move in to other markets. Module 4 Product and Market Development The strategy of the alliance is to penetrate further into their current markets by focusing on continued cost reduction efforts, to allow lower fares. Formation of the alliance between AirAsia and Jetstar has allowed the organisations to leverage their capabilities to achieve a market position where they are the two largest lowcost operators in the Asia Pacific. Module 5 Developing the Strategic Plan There is little content in this case in relation to developing the strategy. Page 8 of 9
Module 6 Strategy Implementation The alliance between AirAsia and Jetstar has been a success to date. There is a clear fit between the strategy and the business systems and organisational structure adopted by the alliance including o there is a similar structure in two businesses models and culture. The culture in both is focused on driving costs out and airfares down. o the experience of senior management allows the strategy to be effective. For example, a director of AirAsia helped start Jetstar and headed Ryanair in the 1990s and AirAsia s CEO and founder has known Qantas CEOs for years. o the alliance structure works around complex crossborder ownership laws. Module 7 Leadership and DecisionMaking There is little content in this case in relation to leadership and decisionmaking. Page 9 of 9