The Competitive Nature of Current Industries

Topics: Airline, Low-cost carrier, Southwest Airlines Pages: 5 (1362 words) Published: April 2, 2004
Due to the current trend of globalization, industries of all sectors are becoming more and more competitive. Rivalry between firms is determined by the industries´ competitive structure which again is determined by globalization and the fact that leading economies are stagnating or show very little growth. This reflects on consumer expenditure as the end consumer is left with less money to spend, thus affecting choices made and at the end of the day also effecting firms who are confronted with a weaker demand condition.

An industry like the airline industry serves as a good example as to how intensive competition can develop; Especially in Europe, which has seen a rapid growth in the low cost carrier sector, established airlines are feeling the competition of these low cost carriers. Exit barriers in this industry are high, as high investments are needed to start up an airline company. Also the fact that a highly specialised infrastructure within the company has to be created makes it difficult for an exit from this industry. Mostly when a company is doing badly in this sector, it either results in bankruptcy (see Swissair in 2002) or takeovers against a symbolic fee (Deutsche BA takeover by German textile magnate H.R.Wöhrl in 2002 against 1 from British Airways, who accepted to get a 25% share of profits until 2006 and will support the operation till then with 35Mio. ) . Especially the second example shows how difficult it is to exit from this industry and that firms are even willing to hand over management to someone else practically for free and even support the operation for a period of time rather than exiting completely from the business, by which even more costs would be incurred.

The Deutsche BA which had been founded in 1992 as a daughter airline of British Airways can be considered as an established business within the industry, however due to the highly competitive structure of the industry, paired with the terrorist attack on New York of September 11, 2001, which had a highly negative on the industry led British Airways to this decision.

Therefore it is fact that the competitive structures of an industry as well as the demand conditions existing, lead to an increased rivalry or competition between established firms. However this statement only applies up to a certain point, where it becomes highly unprofitable for a firm to compete any longer. This was the case in above named example of the Deutsche BA airline, where British airways decided to bypass the exit barriers existing (staff layoff difficult due to unionisation, problems to liquidise the large technical infrastructure which had been built up).

I would like to take the statement that in weak demand conditions with high exit barriers rivalry between established firms can develop even a step further by also including new firms. Again the airline industry will serve as an example; when the EU de-regulated airline business on continental Europe it was the time for Low Cost carriers to penetrate the market. This was immediately felt by established airlines that lost large numbers of their clients, mainly in the leisure sector. Rather than competing against each other, in this case the established airlines decided to team up and create so called "alliances". The largest alliance nowadays is the "Star Alliance" comprising of 15 National carriers and according to own words controlling two thirds of world aviation. This enabled the partnering airlines a favourable cost structure as resources are split and routes not covered by one airline being covered by another airline, thus boosting a large network lucrative especially for the business traveller. In July 2003 the Star Alliance decided to use its position to gain from economies of scale by ordering a number of planes at the value of together 7-8 billion USD and achieving a discount in prices.

Other airlines that did not form part of the Star Alliance quickly reacted too, and in 1999 the "one...

References: Books:
*Thompson & Strickland, Strategic Management, Concepts and Cases, © 2003, McGraw-Hill, New York
*Mansfield & Yohe, Micro Economics, 10th Ed., ©2000, W.W. Norton & Company; New York, London
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