Master of Business Administration

Strategies in Action

Module 5
Intake: January 2008

By: Ambreen Rashid

 Introduction

In this assignment, I have chosen two organizations, where one is competing on price and other
through innovation. I have selected Emirates Airlines (EA), which is operating in the United Arab
Emirate’s (UAE) airline industry for the past 25 years and established a brand name globally for
offering differentiated service and a unique travel experience. The other organization is Air Arabia
(AA), the low cost carrier, which is competing in the UAE market for the past 5 years offering low
fares. The difference between the two strategies will be explained in the next six chapters. In
Chapter I, an overview of the airline industry would be explained with an emphasis on the recent
statistics on the slowdown of the industry due to global crisis. Chapter II would concentrate on the
5 forces affecting the airline industry. Chapter III will introduce AA, the low cost carrier and
concentrate on its value chain, which allows the company to adopt a low cost strategy. Chapter IV
will focus on EA, adopting the differentiated service approach and how it has become a leader in
the industry. Chapter V will comment on the differences between the two airlines and then
conclude with the advantages and disadvantages of following separate strategies. In the last
chapter, Porter’s “stuck in the middle concept” would be explained along with various criticisms as
company can achieve better performance with a blend of differentiated and low cost strategies.

.
 Chapter I

a) Airline Industry of the Middle East (ME) focusing on UAE.

The airline industry is cyclical in nature and affected by various challenges such as strict aviation
regulations, high fixed costs, high operating cost, volatile oil prices and other issues related to
strikes and accidents. Profits are usually modest during the boom times and dismal during bad
times. In order to survive in this highly competitive and saturated industry, airlines strive to set
themselves apart from other by creating brands, which differentiates them from others. Resilience
and flexibility are ways to survive the industry shocks. By delivering their promises, airlines
interact with customers and continue to innovate, which makes customers loyal to them (Khaleej
Times, 2009).

The airline industry is affected by economic growth, trade and political factors. After the
September 11, 2001 terrorist attacks, the industry faced a drop in the number of passengers as
people were afraid to travel. Additionally, high oil prices destroyed the profitability of the airline
industry. Now, due to the current global crisis, the airline industry is again faced with a drop in the
passengers as many people have lost their jobs and cannot afford to plan holidays and travel.
(IATA, 2008)

Globally, many airlines have failed in the current economic crisis with at least 30 airlines went
bust in 2008. Airlines are going through a tough phase, first with the rising oil prices and then with
the financial crisis (Ross, 2009). With the slowdown in the airline industry, 400 aircrafts would be
grounded globally in 2009 in addition to the 1,200 aircrafts grounded in 2008, according to
Ascend Worldwide (UK-based aviation consultancy). European and most Asian airlines will
reduce capacity or remain at the current level of operations. Despite dropping passenger traffic,
the biggest local carriers of UAE, EA and Etihad Airways are expected to triple their fleets by
2015. However, IATA has predicted a loss of $1.5 billion for airlines based in the ME, in spite of
the growth in the region. Despite lower fuel prices, the airline industry has been affected by
the lower demand (Jain, 2009).

However, IATA stated that the passenger demand in the ME grew faster in April 2009 than in any
other region of the world, increasing by 11.2% compared to the same month in 2008. IATA has
forecasted an over global industry loss of $9 billion and fall in revenue by 15% in 2009 to $448
million compared to $528 million in 2008 (Khaleej Times, 2009). According to the General Civil
Aviation Authority, the aircraft movements in UAE rose 11.5% in May 2009 compared to last year
in spite of the economic slowdown (Emirates Business 24|7, 2009).
The growth of the airline industry of UAE is largely a result from country’s economic boom with
growth in the tourism industry.

As a part of the growth strategy, the service quality of many airlines improved, which included e-
booking systems, comfortable seats, in flight entertainment, LCC, etc. In order to survive, many
companies adopted cost reduction and innovative strategies and shared resources with other
airlines by forming alliances E.g. STAR Alliance.

The airline industry is in the maturity stage, where competition is strong as sales begin to
stabilize after a strong growth. With the aggressive competition, advertisements and sales
promotion have increased to gain customer’s attention. New promotional activities are pursued
and distribution has become more intensive (Quickmba.com, 2007).
 Chapter II

The external environment of the airline industry will be analyzed using the Porter’s 5 forces tool,
to ascertain the major challenges:
Threat of new entrants
The new entrants cause a threat to the existing players in the market as they might offer better
services, products and prices. The threat of new entrants is moderate as the level of entry
barriers is high. This is due to the huge capital requirements required for starting up a new airline
company to buy aircrafts and set up the huge networks for operating flights and connections with
the Airport authority. Finance for purchase of aircrafts is arranged by the manufacturers but the
ability to create full fledged network can create barriers to entry. In cases, where companies can
purchase technology and expertise, barrier of entry are low.
EA, who enjoy a good brand name and loyalty, has maintained an excellent position in the market
against the new threats, whereas economies of scale of cost leaders like AA make it impossible
for potential entrants to compete on price, as the more mature firm gets, prices could be reduced
without comprising profitability. It is hard for companies to achieve the minimum efficient scale,
where cost of production is at the minimum like the cost leaders.
The international alliances made between the reputable airlines in the market, e.g. Star Alliance
also pose as a threat to the new entrants. Government creates barriers by restricting competition
via imposing regulations (Quickmba.com, 2007).

Bargaining power of suppliers

Suppliers affect the industry by increasing the price of goods or reducing the quality. Globally
there are very few manufacturers of planes, namely Boeing and Airbus, which produce around
1000 units of commercial planes annually. These limited suppliers hold high bargaining power
due to the huge demand of their planes worldwide. Suppliers adopting differentiation gain
advantage. The price increases of suppliers are passed to the final customers via the premium
pricing strategy. Cost of fuel is also dependant on the economic conditions, where suppliers have
a high bargaining power.

Bargaining power of buyers

Buyers have a strong power in the airline industry as there a lot of passengers, who have many
choices in the market. The new e-ticketing technology gives people the chance and flexibility to
search for airline, either at cheap prices or offering premium services at high price. The quality of
service provided by EA helps to retain customers. The air miles system enduces the customer to
collect more points / miles and eventually redeem a prize on the number of points collected.
Threat of substitute products / services

The threat of substitutes is very low in the Middle East as currently UAE does not have a Metro
(railway) system. Traveling via cars and buses to neighbouring countries like Saudi Arabia,
Oman, etc is very long and cumbersome. People use planes as a means to move faster with
comfort. Firms like EA utilizing a differentiation strategy gain customer loyalty due to the unique
services, which no substitute can offer.

Rivalry among existing firms

This industry is highly competitive due to the increased number of international and local carriers
offering a variety of services and prices and earns low returns as the cost of competition is high.
This carries a risk especially during the period of slowdowns. Due to the global market
liberalization, expansion opportunities for the UAE carriers have broadened, which were earlier
limited by restrictive controls. UAE’s airline industry is dominated by two local carriers, Etihad
Airways and EA. The local airlines take advantage of the geographic centrality and the ability to
access almost any point in the world. EA, is ahead of the other competitors as depicted below
(Centre for Asia Pacific Aviation, 2009).

The external environment of the airline industry poses threat of new entrants, suppliers, buyers
and competitive rivalry but not a real threat from substitutes. The IATA premium traffic around
Middle East from June 2006 to October 2008 is as follows:
The above analysis of the airline industry using the Porter’s five forces model has been criticized
stating that the forces are arbitrary and there was not much research to back the theory. There
are no means to assess the power of the forces or to determine what counteractions could be
taken. Moreover, the model is claimed to be static and cannot capture what occurs during periods
of rapid change in an industry. Porter gave too much attention to the environment facing the firm
and how it should position itself in the environment and no attention to the firm itself (Langlois,
2000).
 Chapter III
In this assignment, I will concentrate on two organizations, namely EA and AA, having separate
ways of operating and using different competitive strategies.
EA offers differentiated services using premium based pricing, whereas AA seeks to attain the
lowest overall cost relative to other competitors using price variations like off peak pricing, early
booking discounts to attract customers (Cited in Module Book 5, 2007). Companies can take
advantage by differentiating their products and services from competitors and through low cost
(Pearson, 1999). Value can be created by establishing a difference, which can be preserved via
differentiation or a low cost. Cost advantage arises by performing activities more efficiently than
the competitors, whereas differentiation arises from the choice of activities (Porter, 1996).

LCC – AIR ARABIA

The advent of low cost carriers (LCC) and online bookings has created intense
competition in the airline industry of UAE dominated by the large premium based
network carriers. UAE carrier, AA has emulated the budget airlines of the West, i.e.
Southwest Airlines and RyanAir providing a “no frills” experience and caters to the
price conscious customers. The open-skies program, signed in 2004 liberalized the air travel
market in the region, giving rise to the abolition of monopolies, greater competition and low fares.
(Centre for Asia Pacific aviation, 2009).

AA was the first airline to recognize and fill the ME market need for a LCC, which delivers timely
service to passengers and facilitates the travel needs of expatriates in the country, whose
population is growing at a faster pace. It adopts a low operating cost structure, offering low fares
in exchange for eliminating traditional passenger services. Many LCC have developed in the
region, like Air Arabia, Jazeera and the recently launched Fly Dubai. The LCCs have changed the
aviation landscape by offering cheaper travel (Hussain, 2008). Companies following a cost
leadership strategy by emphasizing on reducing cost in every activity of its value chain (Lynch,
2003).

Air Arabia (AA), based in Sharjah International Airport, was established on 3rd February 2003 in
Sharjah, UAE. Operations started on 28th October 2003 with the first flight from Sharjah to
Bahrain. Company transformed from a LLC to a PJSC on June 19th, 2007. Currently, Air Arabia
has a fleet of 17 (leased and owned) Airbus A320 aircrafts and has already placed an order of 43
additional Airbus A320. By the end of 2009, Air Arabia expects to increase its fleet to 19. Air
Arabia flies to more than 44 destinations within the ME, Africa, Indian sub-continent, Central Asia,
South Asia and Europe (AirArabia.com, 2009).
It has been able to survive in the market via its no-frills approach. According to one of the regional
investment Banks, EFG-Hermes it benefits from a lean Management structure, close ties with
Sharjah Airport and a first mover advantage into the region's LCC market. Part of the success is
due to the lack of competition. Due to the highest frequency of flights coupled with the lowest
fares, company has made a mark in the industry and attracts price sensitive customers. Air
Arabia has served more than 10 million passengers. Passenger traffic reached 3.6 million
passengers in 2008, a 33% increase compared to 2.7 million passengers 2007 (AirArabia.com,
2009).

How is Air Arabia successful?

Its competitive advantage and economic value comes from the way its activities co-ordinate and
reinforces one another.
.
 Chapter IV

The other organization is EA, which is known as an innovative and customer oriented provider for
advanced services such as offering personal entertainment, audio and TV channels and an online
booking system, which enables customers search and book for flights. Emirates commenced
commercial operations on 25th October 1985 with two leased aircrafts. It is a wholly owned by the
Investment Corporation of Dubai, a Government of Dubai entity. Now, it is a global travel and
tourism conglomerate serving the highest standards of quality. The Emirates Group, consisting of
Emirates (international airlines) and DNATA (ground handling agent in Dubai International airport-
DIA), recorded annual revenue of AED 42.7Billion (2008: AED 36.4 Billion) for the financial year
ended 31st March 2009. Net profit declined from 5.1 Billion in 2008 to AED 1Billion in 2009 due to
the large fuel and oil operating cost of AED 14.4 Billion. EA has strategically positioned their
services, which make them different from their competitors. It has won more than 400 awards for
excellence worldwide. (Emirates.com, 2009)

With a fleet of 132 aircraft, Emirates flies to over 100 destinations in 61 countries around the
world. Emirates' flights account for nearly 40% of all flight movements in and out of DIA and
company’s aim is to increase this market-share to 70% by 2010. Emirates current book order
stands at 160 aircraft, with a total value of around US$50 billion. Emirates is known for its
youngest and modern fleets, which has made them known for the long-haul aviation. In the
financial year 2007/2008, Emirates carried 21.2 million passengers and 1.3 million tonnes of
cargo

Company started with the help of the Dubai government with an investment of $18 million, and
now returns a dividend of more than $100 million/year to them. It is exempted from the high
salaries and larger pension costs as they can avail low labour cost from the neighbouring Asian
countries. There are no income taxes levied in the country. Due to the global routes that it flies,
Emirates has little to fear from the LCC (Knowledge.wharton, 2007).

EA has adopted a pull innovation strategy by changing the travel experience based on the
changing consumer requirements. It has effectively utilised technology to produce customer
friendly services, which has changed customer’s travelling experience.
EA’s strategic behaviour pertains to the Ansoff’s product market strategies matrix. Their
strategies include:

1. Market penetration: The ME sector is the prime market for Emirates Airlines. Company
has adopted the market penetration by increasing their flights to the GCC countries and
other Middle East countries.
2. Product development: It related to product specifications and the type of services offered
more than the introduction of changes in product mix.
3. Market development: Emirates geographic expansion including the entry in the USA
market is an example for market development.
4. Diversification: Entry in the storage market is an example of its attempt of diversification.
 Chapter V

The different approaches of the two airlines have been mentioned above. Brief differences
between the two operating structures are as follows:

AA and EA enjoy the network effects of the first movers as satisfied customers influence
choices of others via word of mouth. They build a psychological standard on what the product is
and what it should be. They can shape consumer preferences and build customers relationships
and loyalty. They form barriers in the path of those who follow.

Disadvantages of following a cost leadership strategy:

Cost efficiency gained for AA in the whole process will enable a firm to lower prices resulting in
high sales as competition could not match low cost base. This can result in increase in market
share/stable profits and superior performance. However, AA always has to strive to be the lowest
cost producer in the industry as more than one company cannot be a cost leader. Moreover,
competitors can reduce their costs in the long term to counter the strategy of a cost leader. Any
change in the technology and demand will incur high costs for the LCC (Cited in Module Book 5,
2007). Additionally focusing on reducing cost is at the expense of other vital factors, which may
become so dominant that the company loses vision of why it took up this strategy. Low cost
leadership will result in less customer loyalty and may result in as a low quality product in the
mindset of the customers (Priem, 2007).

Moreover, the low cost model has been prone to criticism by the Government and Regulators due
to the additional charges by showing airport fees, taxes as separate charges rather than part of
the advertised fare to make the headlines in the newspapers appear low (Wikipedia.com, 2008).

Disadvantages of following a differentiated strategy:

On the other hand, EA offers differentiated services by rendering superior quality service to
satisfy the needs of customers. Costs incurred for advertising to create a remarkable brand is
offset by the premium price charged for its products and services and increase in revenue. EA
uses a successful marketing mix by offering differentiated services, using premium pricing, easily
access to tickets (online and other sales shops) and using sports sponsorship to advertise its
brand. By launching the super jumbo A380 jets in its fleet, EA has gained advantage of a first
mover in the UAE market. It enjoys the reputation for being innovative and the industry leader and
gains control over scarce resources and keeps competitors from having access to them (Cited in
Module Book 5, 2007).

However, there is a risk of competitors imitating innovation as huge financial and strategic risks
are involved (Porter, 1996). There are high development costs and uncertainty over the exact
direction the technology and market will go. EA should closely align their R&D activities with their
business strategies and possess key patents. Devlin and Ennew (1997) state that a differentiation
strategy may be difficult to implant in a service industry as they can be easily copied. Continuous
improvement is required as innovative techniques can be easily copied.

Conclusion:

Porter was the first to analyse Management in the competitive economic concept. His main areas
of focusing on external entities confronting organisations and how to gain competitive advantage
in business had been favoured by everyone. His theories and strategies have assisted many to
gain competitive advantage.

Though Porter’s generic strategies have received considerable support there have been doubts
that these strategies can be used individually. The greatest complaint of Porter’s generic
strategies is that it does not fit all industries. Many people acknowledge Porter’s contributions but
found them extremely difficult to implement as they found the strategies too rigid, inflexible and
out of date by the time it was used since this was really important in the current changing
technological world. Mintzberg (1990), Bartlett and Ghoshal (1991) criticised Porter for narrowing
the focus of strategic Management by focusing on the industry and the situation confronting the
firms regarding the position. Many thought that generic strategies could be used as a starting
point but it does not hold much merit especially when the market is growing at a faster pace.

However, despite these criticisms, Porter’s generic strategies provide a good starting point for
exploring the concepts of cost leadership and differentiation. Other analyses like PESTLE, SWOT
analysis, etc are required to ascertain how the generic strategies employed by a country should
change in accordance with the external factors.
 Chapter VI

b)

According to Porter (1980), a company’s failure to make a choice between cost leadership and
differentiation implies that the company is stuck in the middle and there is no competitive
advantage for such companies, leading to lower performance and only one strategy needs to be
followed in order to achieve superior performance.

This aspect has been criticized and not agreed by other scholars. Kay (1993) and Miller (1992)
have stated that companies like Toyota produces high quality autos at low prices and have the
brand and marketing skills to use a premium based pricing policy. Toyota uses differentiation and
low cost strategies simultaneously leading to the firm’s success. Moreover, a number of studies
by Hill (1988), Murray (1988), Wright (1987) and Miller (1992) disagree with Porter’s one generic
strategy method. According to Campbell-Hunt (2000), there are no results to prove that
performance is enhanced by following only one generic strategy as it is very difficult for
companies to completely ignore cost, no matter how different their products are. A combination of
strategies can achieve superior performance especially within mature industries experiencing
technological change as mentioned in the airline industry. There are viewpoints saying that a
single strategy is not always best as customers seek for a combination of quality, style,
convenience and price. There have been cases in which high quality producers followed a single
strategy and have suffered when another firm entered the market with lower quality product that
met the customer’s need.

A combination of generic strategies can work and this suggests that Porter’s stuck in the
middle concept is not consistent. In view of the above analysis, a statement cannot be
made that one of the strategy is better than the other as both the companies having
different structures operate and earn value. They have been growing and remain profitable
in their business operations.

However, companies adopting both the strategies together can add more value and remain
profitable in the long run. Example: In an attempt to conserve fuel due to the sky rocketing fuel
prices, EA has taken up the initiative to remove foot rest from the economy class by 2010, which
would reduce the weight of the planes by two tones. Additionally, they have also ditched the in
flight magazines on the new A380 jets to improve fuel efficiency (Cronin, 2008).
This step taken by EA, who has changed the travel experience in the UAE market prove that
cutting down cost, leads to better profitability and by using low cost techniques and incorporating
innovative methods for serving the customers, companies can benefit a lot better.
Simultaneously, LCC have also started adopting new ways of travelling by offering additional
services with a minimal fee.

Conclusion

A combination of both low cost and differentiation strategies can provide value to the customers
and also have a cost advantage. Due to the above limitations of Porter’s generic strategies, many
other models also have to be used in assessing the survival of the firm. Due to the lack of time
and the word limitation my assumptions may not be complete.

[Total: 3,847 words]

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