InSTITUION name
Executive Summary
Strategic management is a continuous process. No firm can survive on just a single, static strategy. Strategy needs to evolve to reflect the dynamic environment within which a firm operates. The process of strategic management involves three broad stages: strategy formulation, strategy implementation, and strategy evaluation. Strategic or situation analysis is required to form strategies that can successfully be implemented to achieve organizational goals. Strategy formulation or planning stage follows next and identifies the current position and sets a desired position; a position that the firm wants to achieve in the future. A famous case is that of AirAsia, an airline that started its operations in 1996 within Malaysia. Aligning its corporate strategy with its business environment, just as the strategic management process requires, the airline has successfully achieved its vision of becoming the lowest cost carrier and making flying possible for everyone. The successful strategic analysis of the South Asian environment within which the airline operated led to the formulation of favorable strategies capitalizing on the firm’s core competencies as well as the environmental factors it was exposed to. Its effective strategic management process enabled it to allocate its resources within its different airline services so as to outperform its competitors and successfully expand into the South Asian market. Successful strategies aligned to its overall mission, such as the point-to-point network and the no frills, low fare, provide examples of the importance of strategic management to achieve organizational success.
Introduction
Strategic management outlines a set of decisions and actions used to formulate and implement strategies that will provide a competitively superior fit between the organization and the environment within which it operates to achieve its strategic goals . A strategy is a plan of action which deals with how resources are to be allocated to achieve the set goals amid the business environment. With the globalization of the economies and the businesses, the enterprises have become extremely diverse with a diversified set of operations, employees, products and strategies. While in international organizations, the concept of strategic management has been given a lot of emphasis, however, at the same time, there are smaller companies where strategies are still made informally or are even if they are formulated structurally, the implementation or execution of strategy is poor . Strategic management involves surveying the environment and critically evaluating the growth opportunities and threats in the market. The strategic management process is an on-going process and it should be changed according to changing environment. The role of the leader is to strategize the business and focus on its long-term sustainability in order to make it successful There are three steps in the process – analysis, formulation, and implementation. Strategic analysis can be carried out using various techniques such as surveying and examining both the internal and external market situation. Proactive approach needs to be used that is the organization needs to stay ahead of the market and be prepared should foreseen changes to make its culture and management adaptable to change accordingly (Sadler and Craig, 2003).
The company chosen for analysis, AirAsia, began operations in 1996, starting out with just two aircrafts as a full service domestic carrier in 2001, now, that number has grown to fourty-three aircrafts operating both domestically and internationally. AirAsia’s success is the result of a successful implementation of the low cost carrier (LCC) aviation business model which consists of reduced inflight service, point to point travel, high aircraft utilization, single fleet type, ticketless passenger reservation systems and considerable functional flexibility in staffing . The airline believes in making flying possible for everyone (see the corporate profile in appendix) by attaining low costs and utilizing efficient technology to enhance service levels. This paper outlines the AirAsia’s strategic management process by first strategically analyzing the company and its environment and then identifying the tools that would be used in the formulation of various levels of strategies: corporate and business. The paper will conclude with highlighting how the strategic management process will/has benefit/benefitted the airline.
Strategic Analysis
Strategic analysis comprises three main elements that together aid strategists in understanding the strategic position of an organization: on the external environment, on the internal environment, and on culture and expectations of shareholders. Other authors describe strategic analysis from the perspective of management structure in the following way: mission, competitive analysis of external environment and analysis of organizational environment. It is common in both the above views that an internal and external environmental scanning needs to be undertaken. Strategic analysis is the first step in formulating a strategy for an organization. The proposed steps that need to be undertaken to understand the environment within which the firm operates involve:
- An evaluation of the firm’s values, mission, and vision.
- The organizations strengths and weaknesses and the opportunities and threats it maybe subject to in the future.
- The resources, including the assets or systems, and competencies of the organization.
Vision, Mission, and Strategy
An organization’s vision projects where the organization wants to be in the future, whereas its mission provides a sense of direction, a reason for existence. The vision needs to be far-sighted and should state the long-term objective of the firm. For a vision to be strong enough, a visionary leader is required who can understand the changing external environment and the demands and needs that the organization should be fulfilling in the long run. On the basis of such analysis, the vision of the company is set. Moreover, the vision should be clearly defined and communicated to all stakeholders across the organization so that it is implemented accordingly. Moreover, the mission statement of the firm is based on the vision which states the way the vision would be accomplished. The vision, mission and goals should be aligned with each other for successful implementation of it. Also, these organizational objectives should be aligned with organizational culture and values so that the strategies are adaptable by the internal environment of the organization and the processes are streamlined accordingly. .
For AirAsia the vision is “to be the largest low cost airline in Asia and serving the 3 billion people who are currently underserved with poor connectivity and high fares” , whereas the missions that provide focus to its strategies include becoming a well recognized ASEAN brand preferred by employees for work, and to attain the lowest costs so that everyone can fly. This translates into the belief of the airline “Now everyone can fly”. Once the mission is clearly defined various strategies can be prepared in alignment with the mission. For example, the mission of attaining lowest costs is strategized by using a low fare, no frills approach whereby the airline provides no special services like the executive lounge, and the costs it saves by this are transferred to the consumers in the form of lower fares.AirAsia has devised several other strategies in collaboration with its overall mission. These include :
- High aircraft utilization whereby it has kept its turnaround time to only 25 minutes to enhance productivity.
- Simplifying the operations and employing broad, easily accessible booking channels.
- Using a point-to-point network (one with no central hub) to reduce fuel costs and enhance efficiency.
Situation Analysis – SWOT and PEST
One tool used in the strategic analysis process is SWOT (strengths, weaknesses, opportunities, and threats) analysis. The SWOT analysis studies a business’s internal and the external environment. The internal environment is illustrated by the strengths and weaknesses dimensions whereas the external environment is presented under the opportunities and threats dimensions. It indicates where opportunities should be pursued, where threats should be avoided, and how resources should be allocated.
An organization can exploit its strengths to attain performance goals whereas the weaknesses restrict the attainment of performance goals. Scanning the internal environment of the organization, by evaluating its functions helps identify the core competencies, and how synergies and value can be created. An organization’s strengths can flow from the management function by evaluating the effectiveness of its staff, the degree of centralization and the efficient planning and control systems in place. The human resource function can give strength in the form of motivation that boosts employees’ productivity and lowers absenteeism/turnover. The finance function can be examined to check what profit margins the firm is making, the kind of leverage it has – the debt to equity ratio, and what return on investments that it is generating. The marketing and production aspects can be scrutinized to identify further strengths. For e.g. if the firm enjoys a high market share or a good reputation for service quality, has a vast distribution network and technological innovations, low sales force turnover, and a high quality management system in place, its strategies can be formulated to capitalize on these strengths.
The external environment- national and global- presents the organization with opportunities that can help the organization achieve its goals, and threats that can prevent the organization from doing so.Strategists analyze the firm’s task and general environment. The general environment includes political/legal, economic, socio-cultural, and technological dimensions and they affect the organization indirectly. The international environment introduces new competitors, suppliers and customers, and political and economic trends. For the airline industry in particular, opening up to the international market would require complying to the new rules for flying at airports, it would introduce the airlines to new competitors and customers speaking different languages. One technique appropriate for analyzing the general environment is PEST (political, economic, social, technological) analysis. If we analyze the south Asian Airline industry, the demand for low cost air travel increased after the Asian financial crises of 1997 (something the AirAsia model capitalized on). These crises forced the governments to open up international routes to airlines other than the national flag carriers; Government’s deregulation of aviation rules further enabled many LCCs to offer multi-country services.The establishment of more low cost terminals, with no value-added services in many airports also makes it more feasible for LCCs to serve the customers reasonably. Analyzing the social dynamics, the increasing income and population trends can present opportunities to the airline industry. The South Asian market, particularly the Chinese and Indian where lower income classes have increased in size, provides more growth opportunity to LCCs. The technological environment includes scientific advancements that allow firms to accommodate them in productive ways. For example, the online booking and reservation systemallowed airlines to reduce their staffing and office costs.
The task environment affects the organization directly. It consists of the firm’s customers, competitors, suppliers, employees. The nature of trust and relationship that exists between a firm and its customers, employees, and suppliers dictate the strengths and opportunities that it can exploit. The nature of competition affects strategies- for example, if the firm needs to cooperate with competitors, or undersell them in order to survive.
Once the situation analysis is done the results can be used to formulate new strategies or revise existing ones in order to achieve a competitive edge.
Strategy Formulation, Evaluation, and Choice
An aspect of strategic management is the understanding of the organizational level to which a strategic issue applies. The various organization levels are: corporate level, which defines what business we are in; the business level, which defines how the firm is to compete; and the functional level, which requires coordination between the different functional areas to support the business level strategy. Strategy formulation can be done at all the three strategy levels: corporate, business, and functional. Strategy formulation involves planning that inevitably leads to the establishment of organization’s goals and specific strategic plans. Based on the type of environment a firm operates in, new or revised mission and goals are prepared. Different tools have been proposed to formulate strategies at the corporate and business level. The following section illustrates one tool for each level: BCG matrix and the Porter’s Five forces and strategies after a discussion of how strategy formulation must take a firm’s resources under consideration.
Resource-based Approach
Resources are inputs into a production process. Resources owned by a firm determine the strengths of its capabilities which in turn provide a sustainable competitive advantage. This approach states that strategy must be selected so that it exploits resources and capabilities effectively relative to external opportunities. For e.g. if an airline owns access to cheap, unskilled staff, and fuel efficient jets, then it may well embark upon a cost leadership strategy (with no frills) which would exploit such resources fully and provide the firm a superior edge over its competitors than if it were to opt for a differentiation strategy whereby its unskilled staff may not be able to provide a pleasant experience for travelers. A firm’s most important resources are those which are not easily replicable, durable, difficult to identify, and one in which the firm possesses clear ownership and control. Once the firm has identified these resources, it should strategize accordingly and work to replenish these over time.
BCG matrix
This tool was developed by the Boston Consulting Group to evaluate strategic business units along the dimensions of market share and business growth rate. The growth rate indicates the relative attractiveness of the industry and the market share serves as a proxy for competitive advantage. A strategic business unit (SBU) has its own product line, competitors, and goals compared to other SBUs. At the corporate level, a balance of business divisions and product lines has to be maintained to provide synergies and competitive advantage for the firm. The BCG presents a set of guidelines that can be used to formulate and choose strategies for different SBUs that can be categorized as either Dogs, Cash Cows, Stars, or Question marks.
Dogs have a low market share and their industry’s growth rate is also very low. These businesses don’t require any investments but they only have resources tied up. These SBUs are potential candidates for divestments so that cash is released from unproductive ventures.
Cash Cows have a very high market share but the business growth rate is very low. They are leaders in mature markets and require little cash to operate. They provide high returns on investments and a stable stream of cash flows which can be used to benefit other SBUs like the stars or question marks.
Stars have high market share in a fast growing market. These require constant injections of cash to remain competitive. Once the market growth rate declines, a star can either become a dog or a cash cow. Therefore it is important to nurture them so that they become cash cows in the future.
Question marks have a low market share in a fast growing market. They consume large amounts of resources and returns much less. Question marks need to be evaluated carefully to ensure they are worth the investment required to grow the market share.
The BCG matrix provides a tool for resource allocation among the various SBUs in a corporation as well as the different product-lines within an SBU. However, it has been criticized for viewing SBUs and independent entities and for evaluating them only on the basis of two dimensions. The budgeted provision and distribution of cash resources determines what business to be in. This selection of a suitable strategic portfolio becomes the essential basis for strategy formulation.
Porter’s Forces and Strategies
A tool for formulating business level strategy was proposed by Porter. A choice of whether to grow, retrench, or remain steady is determined by competition experienced by a particular business unit. Porter highlights the five forces to evaluate the extent of competition faced by a business unit and then suggests strategies that can be used for them. These five forces define the competitive advantage of the company by analyzing how the company is dealing with those forces in the industry.
- Threat of new entrants is high when the barriers to enter the market are low. Barriers include the high start-up costs in the airline industry for example. Government’s providing more licenses to the airlines has increased this threat more.
- Bargaining power of buyers is high when they have many options available to choose form or when they are smaller in number. In the airline industry, buyers have many options to choose from and so their power is higher.
- Bargaining power of suppliers is high when they are concentrated and control the resources required by a business to function effectively. The suppliers to an airline industry include the suppliers of raw materials like fuel, food, or airports. Their power is also generally high.
- Rivalry among competitors is also high in the airline industry because of the opening up of new low-cost terminals and allowance of international airlines to take more routes.
- Threat of substitutes is higher for short distance travel as customers can take on road or train. For long distance travel, flying becomes more favorable.
Based on the above forces, three strategies are available to choose from. These are: differentiation, cost leadership, and focus. Differentiation strategy involves providing a product or service unlike those by competitors. Differentiation strategy reduces the threat of new entrant and substitutes because it serves as a barrier to entry. The differentiated service also reduces the alternatives available to buyers thus reducing their bargaining power. A cost leadership strategy pursues cost reductions and tight cost controls in order to produce products more efficiently than competitors. Once a quality product is cheaper it will help tackle all 5 forces outlined above gaining a sustainable advantage for the business. The focus strategy requires organizations to serve a particular market or buyer group thereby specializing in them only. The choice of strategies also depends upon the stage of lifecycle the industry operates. The basic premise is that industry competition differs at every stage (introduction, growth, maturity, and decline) and so strategies must change to reflect these. At the introductory stage a differentiation strategy is pertinent as firms need to distinguish their offering from those of competitors’. At the growth stage, there is intense rivalry and competition requires the need to reinforce product differentiation and provide cost efficient products to consumers now presented with greater choice. The ‘stars,’ that have high market share at this stage, result from strategies that aim at maintaining market share/sales volumes. These strategies can be expanding geographically or launching new products. The maturity stage is only for the fittest. Few dominant firms exist and their strategy focuses on generating stable cash flows by reinforcing the uniqueness of their product. Finally, the decline stage calls for divestments or acquisitions. But the decision must depend on how the product fits into the overall corporate portfolio.
AirAsia employs a cost leadership strategy to grow. It monitors its costs closely and uses the LCCs aviation model to transfer the low operational costs to customers. This cost leadership can be strengthened by the use of information technology that replaces staffing needs, by selling tickets online only. Costs can also be minimized by not providing any value added services or allocated seating arrangements that increase operational costs. Operating in the South Asian markets, where a large population earns very little, AirAsia’s motto of making flying possible for everyone can only be achieved by such a strategy that allows air travel affordable for the masses.
Conclusion
Managing strategically benefits the firms in many ways. Apart from providing guidance and a sense of purpose to the organization, strategic management reduces a firm’s reluctance to change. It makes organizations much alert to external pressures and makes them proactive rather than receptive. It aligns various levels of strategy and helps departments coordinate their strategies. It helps steer the organizational resources to strategy-supportive, productive areas and it also provides a basis for evaluating the organizational performance. As mentioned earlier the process is exhaustive and needs to be conducted regularly to benefit organizations. This process translated into the cost leadership strategy for AirAsia and it claims that this makes them the lowest cost listed airline in the world. Thus, although there are various strategies an organization could adopt, however, it should choose the one that is most suitable in terms of the external and internal environment of the company.
Bibliography
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Appendix 1 – Corporate Profile
Asia's leading airline was established with the dream of making flying possible for everyone. Since 2001, AirAsia has swiftly broken travel norms around the globe and has risen to become the world's best. With a route network that spans through to over 20 countries, AirAsia continues to pave the way for low-cost aviation through our innovative solutions, efficient processes and a passionate approach to business. Together with our associate companies, AirAsia X, Thai AirAsia, Indonesia AirAsia, Philippines' AirAsiaInc and AirAsiaJapan ,AirAsia is set to take low-cost flying to an all new high with our belief, "Now Everyone Can Fly".
Our vision
Our mission
- Create a globally recognized ASEAN brand
- Maintain the highest quality product, embracing technology to reduce cost and enhance service levels
Our values
We make the low fare model possible through the implementation of the following key strategies,
- Safety First: Partnering with the world's most renowned maintenance providers and complying with the with world airline operations.
- High Aircraft Utilisation: Implementing the regions fastest turnaround time at only 25 minutes, assuring lower costs and higher productivity.
- Low Fare, No Frills: Providing guests with the choice of customizing services without compromising on quality and services.
- Streamline Operations: Making sure that processes are as simple as possible.
- Lean Distribution System: Offering a wide and innovative range of distribution channels to make booking and travelling easier.
- Point to Point Network: Applying the point-to-point network keeps operations simple and costs low.
