To begin with the purpose of this essay will analyze that can the Five Forces model assist Air Asia to analyze low cost strategy effectively. Firstly, the discussion of this essay will explain the model of five forces. Afterwards, in order to make points clearly and demonstrate helpfully, there will be an analysis of a company, which is from airline industry, named Air Asia. In addition, it will analyze the current situations and measures of Air Asia about low cost strategy. Finally, there gives a conclusion that summarizes the aspects analyzed on the essay. This essay aims at analyzing low cost strategy of Air Asia by five forces, to put this model into practice and illustrate its usage and value.
Five forces model had created by Michael Porter in 1979, this is a model analyzes competitive factors and helps managers to determine strategy which is related to profits indirectly. Five forces includes five key areas, they are suppliers bargaining power, buyer bargaining power, potential new entrants, threat of substitute product and the rivalry among competing sellers.(Porter, 1979)
Initially, five forces analyze the opportunity, risk and profitability within a given industry based on five key elements in an objective and neutral way. Secondly, this model is suitable for analyzing general industry, such as a company comes from airline industry, however except non-profit firms. Thirdly, five forces contributes to SWOT model at macro level, it provides the external factors for the aspect of strength. In this essay, it argues that what the most helpful element dedicated to low cost is.
The airlines have brought a significant change to people’s daily life. In specific, it has greatly reduced traveling time and gave a convenience to travel from land to land. Air Asia, comes from Malaysia and established on 12th December 2001, it is a successful business that adopted the cost leadership strategy. Air Asia positions and identifies itself by a simple slogan, which is “Now Everyone Can Fly”. (Ricart, E.J and Wang, D., 2005) This slogan highlights the feature of low cost, low price.
Potential new entrants
There is a high barrier to enter the airline industry. The airline is one of the most expensive industries, due to the high cost of start-up capital investment, such as: purchase or lease aircrafts, equipment, hire professional staffs, security measures and office building etc. Furthermore, other barriers are existed undoubtedly. Brand awareness is a factor contributing to market share, customers choose the airline they always trust. Thus, new entrant has to take some time and cost to create and develop brand loyalty, such as marketing expenditure on advertising. (Hanlon, 2007) A data illustrates that advertising and promotion accounts for 2.2% of total operating cost and represents the proportion of distribution is 12.5% (IATA, 1996) In addition, it is hard to get a permit from government, such as entry policy and flight authorization. However, Air Asia planes to expand their business to India, they are with desire to build a partnership with a local promoter to gain more marketing share. For Air Asia, this helps to reduce the threat of new entrants and easier to internationalized its marketing.
Suppliers bargaining power
Every industry has its own supplier and the supplier bargaining power is important as it will effect on the industry by the ability of offering price and quality. (Porter, 1979) The suppliers of Air Asia are normally aircraft supplier, fuel supplier, foods supplier and airport. Owing to a low cost airline, Air Asia needs to sell goods on board to get profits, the goods supplier is one supplier for Air Asia as well. Moreover, not only for airline industry but also for Air Asia, there is quite high supplier power due to only two aircraft suppliers available - Boeing and...