SUMMARY OF COMPETITIVE RIVALRY &

STRATEGIC ALLIANCE IN AIRLINES

ASSIGNMENT FOR BUSINESS STRATEGY CLASS

NAME : Kuspratama
NIM : 29113021
CLASS : R 49B



MBA-ITB
YOUNG PROFESSIONAL PROGRAM
2014



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Chapter 5 Competitive Rivalry & Competitive Dynamics
Rivalry in Business Competition
In the traditional economic model, competition among rival firms drives profits to zero. But
competition is not perfect and firms are not unsophisticated passive price takers. Rather, firms strive
for a competitive advantage over their rivals. The intensity of rivalry among firms varies across
industries, and strategic analysts are interested in these differences.
If rivalry among firms in an industry is low, the industry is considered to be disciplined. This
discipline may result from the industry's history of competition, the role of a leading firm, or informal
compliance with a generally understood code of conduct. Explicit collusion generally is illegal and
not an option; in low-rivalry industries competitive moves must be constrained informally. However,
a maverick firm seeking a competitive advantage can displace the otherwise disciplined market.
When a rival acts in a way that elicits a counter-response by other firms, rivalry intensifies.
The intensity of rivalry commonly is referred to as being cutthroat, intense, moderate, or weak, based
on the firms' aggressiveness in attempting to gain an advantage.
In pursuing an advantage over its rivals, a firm can choose from several competitive moves:
Changing prices - raising or lowering prices to gain a temporary advantage.
Improving product differentiation - improving features, implementing innovations in the
manufacturing process and in the product itself.
Creatively using channels of distribution - using vertical integration or using a distribution
channel that is novel to the industry. For example, with high-end jewelry stores reluctant to
carry its watches, Timex moved into drugstores and other non-traditional outlets and cornered
the low to mid-price watch market.
Exploiting relationships with
The intensity of rivalry is influenced by the following industry characteristics:
1. A larger number of firms increases rivalry because more firms must compete for the same
customers and resources. The rivalry intensifies if the firms have similar market share,
leading to a struggle for market leadership.
2. Slow market growth causes firms to fight for market share. In a growing market, firms are
able to improve revenues simply because of the expanding market.
3. High fixed costs result in an economy of scale effect that increases rivalry. When total costs
are mostly fixed costs, the firm must produce near capacity to attain the lowest unit costs.
Since the firm must sell this large quantity of product, high levels of production lead to a fight
for market share and results in increased rivalry.
4. High storage costs or highly perishable products cause a producer to sell goods as soon as
possible. If other producers are attempting to unload at the same time, competition for
customers intensifies.
5. Low switching costs increases rivalry. When a customer can freely switch from one product
to another there is a greater struggle to capture customers.
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6. Low levels of product differentiation is associated with higher levels of rivalry. Brand
identification, on the other hand, tends to constrain rivalry.
7. Strategic stakes are high when a firm is losing market position or has potential for great
gains. This intensifies rivalry.
Defining Your Competitive Position
In this final portion of the competitor analysis your focus turns away from
competitors to your business. Specifically, what factors will set your product or service apart
from your competitors? There are at least two approaches available for you to explain your
sources of competitive advantage.
Opportunities and threats: The competitor analysis (SWOT-Strength, Weakness,
Opportunity, Threat) grid reveals the strengths and weaknesses of your competitors. The
other half of the analysis is to look for opportunities and threats that your company can use.
For example, a weakness-opportunity strategy would create an opportunity for your business
based on a weakness found in competitors. Or a strength-threat strategy focuses on risk
avoidance by initiating a strategy that minimizes a threat caused by a competitor's strength.
Design your dynamics accordingly, specifying what will give your business a competitive
edge in contrast to other competitors. For example, your business will provide a full range of
products, competitors A and C don't. Or your business will provide after-purchase customer
service, something only competitor C does. Or your merchandise will be of a higher quality
and include a money-back guarantee, something no other competitor does. Or competitors B
and C sell the best widgets, but your site will sell the best gadgets.
Competitive strategies: Look at your product, pricing, promotion, distribution, and service
and ask the following questions (adapted from the competitor analysis grid):
Cost leadership: Can you be a low-cost producer and sell equivalent or better goods in
the marketplace for less?
Differentiation: How can you distinguish your product in the marketplace?
Innovation: Is there opportunity to create a new way of doing business, perhaps one
that changes the nature of the industry?
Growth: Are there opportunities to expand production, sell into new markets,
introduce new products?
Alliance: Can current or prospective production, promotion, and distribution be
improved through partnerships with suppliers, distributors, and others?
Time: Can your business reduce product cycle time? Offer express customer service?
Use time in other ways that your competitors are not doing?
There may also be opportunities for you to:
Lock in customers and suppliers
Create switching costs for customers and/or suppliers
Improve business processes
Raise entry barriers for rivals and substitute products
Create a strategic information system or strategic information base
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The answers to these questions might reveal sources of competitive advantage such as
patents, branding (e.g., a marketable domain name such as plumber.com), innovative product
sales techniques, better and/or cheaper sources of supply than competitors, more
entrepreneurial management, and superior customer relationship management strategies.
Whether you use the opportunities-and-threats approach, competitive strategies
approach, or a combination, you will find that a company's competitive positioning strategy is
affected by a variety of factors that are related to the motivations and requirements of the
consumers in the target market, as well as the offerings and positioning strategies of
competitors.Whatever changes (dynamics) you plan will point out exactly how your product
or service will be perceived by customers as different, and better, than what is offered by
your competitors.

RM 8 Strategic Alliance in Airlines Operation
As companies gain experience in building alliances, they often find their portfolios
ballooning with partnerships. While these partnerships may contribute value to the firm, not
all alliances are in fact strategic to an organization. This is a critical point, since, as this
article will explain, those alliances that are truly strategic must be identified clearly and
managed differently than more conventional business relationships.Due to the levels of
organizational commitment and investment required, not all partner relationships can be
given the same degree of attention as truly strategic alliances. The impact of mismanaging a
strategic alliance or permitting it to fall apart can materially impact the firms ability to
achieve its core business objectives.
What is it that makes an alliance truly strategic to a particular company? Is it possible
for an alliance to be strategic to only one of the parties in a relationship? Many alliances
default to some form of revenue generationwhich is certainly important but revenue
alone may not be truly strategic to the objectives of the business. There are five general
criteria that differentiate strategic alliances from conventional alliances. An alliance meeting
any one of these criteria is strategic and should be managed accordingly.
Critical to the success of a core business goal or objective.
Critical to the development or maintenance of a core competency or other source of
competitive advantage.
Blocks a competitive threat.
Creates or maintains strategic choices for the firm.
Mitigates a significant risk to the business.
The essential issue when developing a strategic alliance is to understand which of
these criteria the other party views as strategic. If either partner misunderstands the others
expectation of the alliance, it is likely to fall apart. For example, if one partner believes the
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other is looking for revenue generation to achieve a core business goal, when in reality the
objective is to keep a strategic option open, the alliance is not likely to survive.
The Impact Of Airline Alliances
At this moment, there are three main airline alliances around the globe. First of all,
Star Alliance, which was created in 1997. Second, OneWorld, established in 1999 and
presently having 12 members. Last, the youngest airline alliance is SkyTeam, formed in 2000
and consists now of 18 member airlinesIn this paper, the impacts of airline alliances on their
members will be discussed And the influences of airline alliances on the airports they fly at
will be explained. In this review, both positive and negative influences will be discussed.
1. Impacts on member airlines
Positive impacts on member airlines
A first positive impact can be found in saving the airlines costs on various areas. For
instance, when buying aircraft materials for maintenance purposes, member airlines can
reduce the total costs by purchasing these resources together and may receive bulk discounts.
The same counts for the bulk purchase of aircraft. A second positive impact on member
airlines can be retrieved in the increased passenger traffic. The cause of this increase is
generally caused by the extension of the airlines network by using code-sharing Code
sharing is beneficial for both the selling airline and the operating airline. On the one hand,
it is advantageous for the selling airline as it is selling a ticket of the operating airline under
its own designator code. This means that the selling airline gained access to new markets
without having to operate their own aircraft there. On the other hand, the operating airline is
likely to carry more passengers on board as the tickets are sold through more distribution
channels than rather its own.
A third positive impact can be found in the area of labour costs. Nowadays, labour
costs represent quite a considerable part of an airlines operating cost. Labour costs differ
more between airlines in the same markets, unlike other costs as ground handling, fuel and
airport fees. Iatrou (2006) gives two reasons how an airline alliance could help in reducing
labour costs. First, the number of sales and ground personnel could be reduced by sharing
offices at bases of another member airline, instead of maintaining its own offices across the
globe. Second, it is argued that alliances facilitate member airlines to resort to the low-wage
structure of its partners, for example cabin and cockpit crew, without saving on employee
quality.
Negative impacts on member airlines
Although alliances have several positive effects on member airlines, being in an
alliance could also have some negative impact on member airlines. First, it is argued that
participating in an alliance could affect an airlines brand image. This problem may be
triggered by the variety of images within the alliance. The authors suggest that it could be
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possible that an image for an alliance is created that is unlike the image of any of the
affiliated airlines. However, a concession between the images of the most dominant member
airlines is considered to be more likely. Especially for smaller airlines it could be considered
to be hard to adapt to the created image of the alliance.
A second negative effect could be conflicting agreements. Iatrou (2006) explains that
it is likely that all alliances members use the same supplier. Before an airline accesses to an
alliance, it usually has long-standing relationship with different suppliers, such as catering,
Central Reservation System (CRS) and so on. The airline may find it difficult to rescind these
contracts because of possible penalties as a consequence. Moreover, when an airline agrees
on a new supplier, it will very likely have to invest time and money in getting familiarised
with the new suppliers and their systems. This brings us to a third possible negative effect.
Increased costs for an airline could be considered as another probable negative impact
on member airlines. Next to the regular subscription fee that a member airline has to pay,
Iatrou (2006) mentions the so-called sunk-costs for the airline. These tangible expenses
cover all adjustments that have to be made in order to meet the alliances requirements, like
the aircraft interior. These investments are to be made to ensure effective alliance operations
and to have consistent commitment of the member airlines to the alliance. Especially for
relatively small airlines, these costs can be seen as a considerable investment, which might
make them more dependent on the alliance.
2. Impacts on airports
Positive impacts on airports
The presence of airline alliances has various positive impacts on airports. As all
members in an alliance have an extended destination network, because of the connectivity
possibilities of their alliance partners, it can be argued that the number of transfer passengers
at airports increases. As a consequence, this increasing number of transfer passengers has
also a positive effect on the purchase of duty-free products in the airport shops. In order to
increase the sales at airport shops, an airport can decide on opening speciality stores which
may interest international transfer passengers.
3.2. Negative impacts on airports
In contrast with the various positive effects of airline alliances on airports, there are
also some downsides.As airline alliances bring an increased number of additional traffic,
congestion at an airport can be considered as a negative effect, particularly at peak times.
Especially when there is an ineffective use of the airport infrastructure, it can be hard to
harmonise the flights in a short timeframe. At many of this type of airport it has been
considered unavoidable to split the use of the runway into time-defined segments
commonly known as slots. According to IATA (2011), slots can be defined as a
permission given by a coordinator for a planned operation to use the full range of airport
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infrastructure necessary to arrive or depart at an [] airport on a specific date and time.
Besides, most flights at hubs are scheduled in so called waves. In each wave, a large
number of arriving flights in a short timeframe is followed by more or less the same number
of departures, after allowing some time for reallocation of passengers and luggage.
As airports do not have an unrestricted peak capacity, especially during such a wave,
airlines are ought to adapt their schedules. Dennis (2001) discusses two main options for
rescheduling. First, flights can be added to the borders of the present waves. Second, new
waves can be developed to accommodate these additional flights. With regard to the number
of connections, the first option is more likely to be chosen. However, while extending the
current wave, the connection time will also increase.
A second negative impact on airports is the investment that airports have to make for
alliances in order to accommodate seamless transfer connectivity. In order to reduce the
Minimum Connecting Time (MCT) for passengers, airports have done some adjustments to
their infrastructure. An example is Brussels Airport in Belgium, which upgraded their
customs and immigration facilities to create a better flow of passengers transferring from a
Schengen origin to a Non-Schengen destination. Some airports are not designed to
accommodate traffic from airline alliances. For example, when an airport has multiple
terminals that are not located near each other. This might take a passenger a long time to
transfer when alliance partners are spread over multiple terminals, affecting the MCT as well
(Dennis, 2001).

Refferences
Dennis, Gustavo, Lynette (2001), An Empirical Investigation of the Competitive Effects of Domestic
Airline Alliances. NBER Working Paper., Journal of Law & Economics : University of Chicago.
Hitt, Ireland, Hoskisson (2011), Concept Strategic Management (Competitiveness & Globalization).
9th Edtion., Canada : South-Western CENGAGE Learning.
Iatrou, Alamdari (2005), The Empirical Analysis of the Impact of Alliances on Airline Operations.
Journal of Air Transport Management 11., Cranfield University : Bradford.
Iatrou (2006) Airline Choices for the future : From Alliances to Mergers. Global Symposium on Air
Transport Liberalization., ICAO Dubai : UAE.