Strategic Practice Exercise: (page #81)
1. Score each competitive force in the airline industry and provide a brief rationale for your assessment. ·Rivalry Among Existing Firms: (High)
When one major company in an industry makes a change in costs or services that could potentially increase their clientele, a major competitor almost always follows suit. Price matching is a prime example of that, therefore the threat is high. West Jet is one company that offers flights at a discount and forced Air Canada to create new banners to compete with the discounted prices. All major companies and firms in an industry watch each other’s every move very carefully, and match any move with a countermove. During slow season in the airline industry, a firm can only grow by taking some of another competitor’s market share and customers. When someone has to book a flight, they have to book a flight. Most people these days use the internet to book flights and compare services and prices from rival firms with relative ease. Accessibility and price are the key factors in driving rivalries. The deregulation of the Canadian airline industry in 1984 created a very intense rivalry between two of the biggest airline companies in Canada; namely, Canadian Airlines and Air Canada. Canadian Airlines built its strength in the industry by making a few key acquisitions of companies in Western Canada. Air Canada recently became a publicly traded corporate entity, building capital through public offering. When these two powerhouse companies created a difficult situation, such as the offering of less expensive options and discount flights, they both lost revenue and nearly crippled them financially. ·Relative Power of Other Stakeholders: (High)
Other stakeholders such as governments have a relatively large amount of power over most national airlines in Canada, because they are partially owned by them. Taxes on flights out of Pearson International Airport are some of the highest in the world and these taxes are regulated by the government. Taxes, policies and regulations are some reasons why the government has power in this industry. They can limit the entry to the industry within the region by restricting access to important things, like raw materials and licensing requirements. In Canada the government has foreign ownership limits in almost all transportation services, and the government always has and always will regulate the airline industry. The Canadian government has used its power in the past by protecting local companies in the industry, such as Air Canada, from companies based in other countries attempting to acquire them. Other regional stakeholders, in particular those in the tourism industry, have some indirect power over the airlines by creating and perpetuating the demand for flights. An example of this is when a tourism organization advertises international destinations and attractions. Marketing initiatives of those organizations are meant to whet the appetite of the consumer, thus increasing the demand for flights to those destinations and, accordingly, the airline industry is then obliged to increase the supply for flights.
·Threat of Substitutes: (Medium)
In almost every industry the threat of substitutes are apparent. Marketing and R & D are a huge part in minimizing a company’s threat of substitutes. The more the public sees, hears or reads about your company the better. The threat of substitution in the airline industry is inevitable. Substitute products have the potential of creating a strong competitive force when they enhance the value for the customers, especially in the airline industry. Also, substitutes improve the price-performances of each firm within the industry. When booking a flight to a destination close in proximity, people often compare their options. For example, the cost of a return flight to Newark, New Jersey from Toronto may exceed $ 1,500 per person; the same trip via automobile would cost...