Reasons For Strategic Decision At Thai Airways
An inspired and carefully considered business strategy can be used to guide a company to achieve greater profitability and success, as it is known that strategy can be viewed as plan, ploy, pattern, position and perspective (Kourdi 2009, p3). To those companies that rely on low price to attract customers, such as budget airlines, business strategy plays a significant role in their business. However, business strategy should be based on the understandings about competition and threats in the industry, micro and macro environment factors that affect the success of their business, and strengths and competitive advantages of the company. Only can business strategy that is based on these understandings be used to achieve success of business
Reasons for Launching a Low-cost Airline with Thai Airways
Tiger Airways is going to launch a low-cost airline with Thai Airways, which will target domestic and international destinations within five hours’ flying times distance on the basis of Bangkok (Creedy 2001). There are many reasons that Tiger Airway launched this airline jointly with Thai Airways, and the following five reasons are the most important ones:
To compete effectively. It can be seen from the case that, by joint venture, it is easier for Tiger Airways to grow its business in Thailand, and will compete effectively in this region with Jetstar and AirAsia (Creedy 2001).
Additional network advantages. By joint venture, it will build better network relationship with Thai Airways and may have advantages to deal with future spread risk and competition, as Thai Airways becomes a partner rather than a competitor (Creedy 2001).
Additional cost advantage. By possessing 49% of the joint venture, and other 51% owned by Thai Airways, Tiger Airlways has chance to use the advantage of Thai Airways to maintain and even strength its low cost advantage (Creedy 2001).
To reduce risk. By additional network and cost advantages brought from this deal, Tiger Airways is capable to face further spread risk.
Pan-regional strategy. This joint venture is an important step forward in Tiger’s pan-regional strategy. It is noted by CEO of Tiger Airways, Tony Davis, that “Bangkok is one key South East Asian gateway within striking distance of both India and China (Creedy 2001). By additional network advantage from joint venture with Thai Airways, it becomes easier for Tiger Airways to implement this strategy.
Reasons for Strategic Decision
Tiger Airways’ decision of launching a new airline jointly with Thai Airways can be considered as a strategic decision. Reasons are stated as follows:
This decision affected the long-term direction of Tiger Airways. As mentioned above, this decision was an important step forward for its pan-regional strategy (Creedy 2001).
This decision helped achieve advantage for Tiger Airways. Additional network advantage with Thai Airways and cost advantages were achieved by this joint venture decision.
This decision expanded the activities scope of Tiger Airways to low-cost flight to Bangkok/ Thailand, and might expand to India and China as well This decision had major resource implication. It is mentioned in the case that by 2015, 68 flights would be allocated to this low-cost airline (Creedy 2001).
This decision created new opportunity for Tiger Airways. By this decision, Tiger Airways became more competitive with Jetstar and AirAsia, which created new opportunity for the growth of Tiger Airways (Creedy 2001).
This decision affected operational decisions of Tiger Airways. Investment in this new airline needs to be taken into consideration by Tiger Airways.
Obviously, this decision can be viewed as a plan, a ploy, a pattern, a position, a perspective. Therefore, it is a strategic decision.
Macro Environment Analysis
PESTEL model is a good technique that can be utilized to analyze macro environment factors that affect the industries, as well as low-cost airline industry. It contains six factors which are Political, Economical, Social, Technological, Legal and Environmental factors (Robinson 2009, p75).
Political: Government instability is a major factor to the low-cost airline industry. For example, the affairs of Prime Minister of Thailand, Thaksin Shinawatra and his Red-Shirt, led to a fatal drop in tourism industry, which may decrease the customer amount of low-cost airline industry (BBC 2010).
Economical: Economy recession and financial crisis affected the profitability of low-cost airline industry players. A survey carried by Airline Business indicated that although revenue didn’t show decline, profitability was affected by the financial crisis. Many players encountered a loss in 2008 compared to 2007 (Dunn 2009).
Social: The attitude of income distribution and balancing work and leisure are factors that can’t be neglected. People who are willing to distribute their money on travelling and their free time of leisure will increase the customer amount of the industry.
Technological: Technology that makes standing seats for airlines available influence this low-cost airline industry seriously. The availability of standing seats for airlines will cut down the cost of industry will make it more attractive (BBC UK, 2010).
Legal and Environmental: Employment laws, competition law, threat of natural causes, carbon dioxide emission are other factors of the low-cost airline industry.
Corporate Strategy, Business Level Strategy and Operational Strategy
Corporate Level Strategy
According to the definition from Collis and Montgomery (2005, p8), corporate level strategy can be defined as the way that a company uses to create value through configuration and coordination of its multimarket activities. There are three main emphases of this definition, value creation, configuration and multimarket activities. It is indicated in Appendix 1 that the corporate strategy of Tiger Airways is that: To create a portfolio of profitable routes throughout Asia and Australasia by establishing airlines in market where low-fare, low cost business model has exceptional potential for sustainable profitability with ancillary services such as luggage upsize, seat selector and sports equipment check-in.
Business Level Strategy
One model developed by Bowman called The Strategy Clock can be used to get good understanding about business level strategy, which relates competitive advantage to cost advantage and differentiation advantage. These successful strategies can be illustrated as following levels: Low price/ low added value, Low price, Hybrid, differentiation without price premium and Focused differentiation (Angwin et al 2007, p121)
All these different strategy are classified based on two factors, price and value. It can be seen from Appendix 1 that the price of Tiger Airways is low because the company implement cost leadership strategy. Besides, compare to other airlines, the value added by Tiger Airways is limited. Luggage is limited to a certain size; seat selection will be charged. Only is purchased food or drink is allowed compare to free food and drink in SIA. Thus, the activities are low value-added. Therefore, based on these two factors, the business level strategy is Low price/Low added value.
According to the definition of Lowson (2002, p57) that operational strategy can be viewed widely as a value delivery strategy. It is all about decisions which helps create and deliver product/service, value to customers through companies’ core competencies. Therefore, the main operational strategy of Tiger Airways is to maintain and enhance the core competencies of low fare/ low cost. Many decisions have been made based on this strategy:
Joint venture with Thai Airways to launch new airline.
Install advanced 3-D weather radar to increase efficiency (Tiger Airways.com 2010)
Minimize service that charges customers on customers’ behalf.
Porter’s Five Forces Analysis
Porter’s five forces model is one of the most well-known models in business literature that produce the competitive situation in any industry (Beamish & Williams 2008 pp76-77). The five forces and their relations are indentified as follows:
Threat of new entrants
Threat of substitutes
Bargaining power of buyers
Bargaining power of suppliers
Intensity of rivalry
Source: Caneval Ventures. Models on the dynamics of innovation. http://www.caneval.com/vision/innovation/innovation2.html [Last accessed: Dec. 7th 2010]
Threat of new entrants
The threat of new entrants of the low-cost airline industry is very fierce (4 out of 5). Although the investment of setting up new airline companies is huge to those organizations which are not in the airline industry, it is feasible to other organizations which are already in airline industry to establish new companies which serve the low-cost airline industry. The establishment of Tiger Airways can be an example to support this point. Tiger Airways is partially by SIA, which is the leading airline service provider all over the world.
Threat of substitutes
Long distance coaches, trains, passenger ships, network and other airline service providers (such as SIA) are the main substitutes of the low-cost airline industry. It can be seen from Appendix 2 that, although the low-cost airline industry is a booming industry with high growth rate, Network airline service providers are still the main provider in the airline industry. And Long distance coaches and trains play much more significant role in transportation in countries such as China because of the poor development of air transport. Therefore, this threat is very high (3 out of 5).
Bargaining power of buyers
In low-cost airline industry, though customers are easy to find substitutes but these substitutes may cause higher price or take more time to reach their destinations. Therefore, the bargaining power of buyers is not so strong (2 out of 5). For example, it is clearly seen from Appendix 3 that SIA return ticket for travelling between Singapore and Hong Kong is around 100SGD expensive than that of Tiger Airways.
Bargaining power of suppliers
Obviously, the main supply of low-cost airline industry should be the aircrafts, and Boeing and Air Bus are the two suppliers of aircrafts to low-cost airline industry. It means that these two companies are in the position of monopoly. Therefore, their bargaining power is extraordinary strong (5 out of 5).
Intensity of rivalry
The intensity of rivalry of low-cost airline industry is not so fierce (2 out of 5). Although the core competency of low-cost airline players is low fare/low cost, they have regional characteristic, which means only few airline players are recognized by customers in a certain areas. For instance, in South East Asia, Tiger Airways and AirAsia are the two recognized players by customers.
In conclusion of the analysis of Porter’s five forces model, the outcome can be summarized as the following picture. Low-cost airline industry is an attractive industry, as buyers don’t have strong bargaining power, which means this market is a seller market; low threats of substitutes means low-cost airline is a good choice among the products or services. Besides, although bargaining power of suppliers is extraordinary high, every player in the industry will face this problem, and because of a booming industry with high growth rate, low-cost airline industry is an attractive industry.
Value Chain Analysis
Porter’s value chain model is a typical value chain model, which state nine kinds of business activities (Wang 2007, p81). And these business activities are classified into assistant and basic activities, which can stated as below:
Wang Weijun (2007). Integration and innovation orient to e-society. New York: Springer Science+ Business Media, LLC. p81.
However, this model aims at manufacture companies. Tiger Airways is in the industry of low-cost airlines, which is a service industry, therefore, the model needs to be modified based on the assumptions as follows:
All the purchases are for infrastructure development purpose.
Service is produced once purchase happens.
Therefore, it can be seen from the case and other information from website and Tiger Airways 2010 annual reports that the value added activities are presented as follows:
In the case, it is said that by 2015, 8 flights would be allocated to the new launched low-cost airline; this is the value-added activity which develops the infrastructure of Tiger Airways (Creedy 2001).
In the annual report, it is stated that” all new directors to the Board are briefed by Management on the Group’s business activities, strategic directions, and will be sent for external training and development programmes”. This is the value-added activities on manpower resource management (Annual report 2010). By this, Tiger Airways is able to make out better corporate, business level and operational strategies for the long-term development of the company and sustain the cost advantage as well.
According to the media release of Tiger Airways, in 2010, by partnering with Honeywell, the company installed advanced 3-D weather radar enhance safety and passenger comfort. This can be viewed as a value-added activity based on technology development (Tiger Airways.com 2010).
The annual reported stated that by renewing contracts with airports, ground services, providers and other suppliers, and purchased two aircrafts from Airbus (own rather than lease), enabled Tiger Airways to further reduce operating cost and in tune increase value to customers (Annual report 2010).
According to the website, extra service is provided such as luggage upsize, seat selection and as well as related service, for example, hotels, insurance and car hire to enhance the types of service that customer can enjoy through Tiger Airways.
There are many other business activities done by Tiger Airways, which enrich the value of service provided by Tiger Airways and gain wide recognition among customers, this is the exact reason helps Tiger Airways be one of the leaders in South East Asia to provide low-cost airline service.
Common Cost-cutting Strategies
According to many literatures, there are many different kinds of cost-cutting strategies, for instance, rationalization, standardization, central processing of transactions, technology application and cost management strategy (O’Brien & Datta 1989, p165). Therefore, related to low cost carriers, the common cost-cutting strategies can be presented as follows:
Rationalization. To low cost carriers, non-value-added activities are removed and only do those value-added activities remain. For example, there is one rule in Tiger Airways that only is purchased food or drink is allowed.
Standardization. Another strategy is to standardize the service of low cost carriers. It can be seen for Appendix 4 that the service of Tiger Airways is standardized, as extra services will be charged by a certain price.
Central processing of transactions. Crucial processes are identified by low cost carriers that need to be focus on to provide the basic service to their customers.
Technology application. New technology can be applied to reduce operational cost and even reduce the proportion of risk. As mentioned above, the 3-D weather radar is applied by Tiger Airways to increase the accuracy of weather prediction to reduce unnecessary loss by reason of bad weather (Tiger Airways.com 2010).
Cost management strategy. This strategy is used by low cost carriers to understanding the factors that affected the cost such as fuel, labour, distribution, inventory management, purchasing, and foreign exchange (IATA Training Portfolio). Take Tiger Airways as an example, the two main business regions are South East Asia and Australia. Therefore, the foreign exchange rate between AUS Dollar and SGD is a factor that cannot be neglected Another evidence stated in Tiger Airways 2010 annual report that by renewing contracts with airports, ground services, providers and other suppliers, and purchased two aircrafts from Airbus (own rather than lease), enabled Tiger Airways to further reduce operating cost.
Three Future Strategies
The strategies will be given according to Ansoff’s product/market matrix.
Source: Berger Roland., Kotler Philip., Bickhoff (2010). The Quintessence of Strategic Management. London: Springer Heigelberg. p36.
Market Penetration. To Tiger Airways, it should use activities such as advertising, sales promotion to increase seat occupancy rate, which in turn will reduce the operating cost, this is the way to build strong core competencies.
Market Development. It is evident in the case that market development is a suitable strategy for Tiger Airways to reduce operating cost and company development (Creedy 2001). By adding new airlines through joint ventures with other airline companies, it will give Tiger Airways have chance to benefit from advantages of other airline companies.
Diversification. There are two main types of diversifications, related and unrelated diversification. Thus, To Tiger Airways, the company may use related diversification strategy to expand its business, such as to international express business. Through this strategy, the company can reduce the operating cost.
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Figure 1: Airline Market Share by Type of Carrier
Note: All others is primarily regional jet carriers but may include a small percentage of scheduled charter carriers.
Source: M.R. Dayton, “Trends and Demand in Aviation Markets,” presentation at the ATCA/FAA/Nav Canada Technical Symposium, Office of Inspector General, U.S. Department of Transportation, 2004.