Choose the airlines as an industry to apply the Michael Porter's 'five forces' model and discuss how one established airline like SIA should respond to the competitive environment.

Topics: Airline, Low-cost carrier, Southwest Airlines Pages: 7 (2101 words) Published: May 16, 2008
QUESTION:The industry analysis is necessary in the strategic marketing planning in order to identify the opportunities and threats in the competitive environment. Choose the airlines as an industry to apply the Michael Porter's 'five forces' model and discuss how one established airline like SIA should respond to the competitive environment, after analyzing the industry.

SIA is internationally recognised as one of the world's leading carriers. The company had recognised that in this highly competitive market, any advantage gained by one airline over others will be short-lived, and ideas that are new will become commonplace in a matter of months. As such, SIA noted the importance of having to always stay at the forefront both in service and technology.

This strategy of SIA focuses primarily not on reducing costs, but on enhancing quality or service and preventing any customer problem from arising. SIA has succeeded most uniquely with this type of strategy in the airline industry, a strategy commonly employed in service businesses that command premium prices with high margins, businesses in which there are a high degree of repeat business, with word-of-mouth praise by customers as one of the most important marketing channel.

Internally, three cost items account for half of SIA's operating cost: fuel, aircraft depreciation and wages. There is little that can be done with respect to fuel cost except for judicious hedging. As for aircraft cost, SIA is universally acknowledged as being second to none in securing the best prices and purchase terms from aircraft and engine manufacturers. That leaves wages. The airline's fixed wages amount to less than $800 million a year, roughly one tenth of total operating expenditure, a modest proportion indeed. Variable wages comprise the rest, consisting mainly of profit-based bonuses and crew allowances based on actual hours of flying by pilots and cabin attendants. The recent wage cuts were a result not of lavish recruitment or over-indulgent pay rises in the past, but of the cumulative damage wrought by terrorism, war and SARS, and the need to stay competitive as other carriers undergo major restructuring of their cost structures.

Externally, the industry analysis has a direct effect on a company's strategic competitiveness and above-average returns. While companies, in this case, our very own SIA, cannot directly control the elements of the general environment, it can influence and will be influenced by factors in the airline industry and competitor environments. The intensity of competition in the airline industry and its profit potential are a function of Michael Porter's 'five forces' model of competition: the treats posed by new entrants, the power of suppliers, the power of buyers, product substitutes, and the intensity of rivalry among competitors. Studying these forces allows SIA to find a position in the airline industry where it can buffer itself from the power of the forces in order to increase its ability to earn above-average returns.

Threats posed by new entrantsNew entrants to an industry typically bring to it new capacity, a desire to gain market share, and substantial resources (Wheelen and Hunger, 7th Ed, pg 61). New entrants to an industry can raise the level of intensity of the competitiveness among companies, thereby reducing its attractiveness. The threat of new entrants largely depends on the barriers to entry - obstructions that make it difficult for a company to enter an industry (Wheelen and Hunger, 7th Ed, pg 62). High entry barriers exist in some industries (e.g. shipbuilding) whereas other industries are very easy to enter (e.g. estate agency, restaurants). Key barriers to entry include the need to gain economies of scale quickly, the need to gain technology, large capital and investment requirements, high customer switching costs, lack of access to industry distribution channels, the likelihood of retaliation from existing industry players, and...

References: homas L. Wheelen and J David Hunger (2000) Strategic Management And Business Policy 7th Edition Prentice Hall InternationalFred R. David (2001), Strategic Management - Concepts And Cases 8th Edition. Prentice Hall InternationalMary Coulter and Stephens P. Robbins (1999) Management 6thEdition, Prentice Hall InternationalJ. David Hunger and Thomas L. Wheelen (2003) Essentials of strategic management, Prentice Hall InternationalCharles W.L. Hill and Gareth R. Jones (2002) Strategic management : an integrated approach 2nd Edition, Houghton MifflinPhilip Kotler (2003) Marketing Management 11th Edition, Prentice Hall International
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