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QUESTION 1
Throughout its history Chinese Airlines Limited (CAL) has been beset with a number of problems that have negatively impacted both its profitability and reputation. The sources of these woes have been diverse in nature ranging from human resource management issues to various political considerations. The airline continues to face a number of threats as well as harboring internal weaknesses that may threaten to derail the company’s future prospects, however the company also possesses significant internal strengths and possible opportunities to avail. These will be described below using various analytical methods.
PEST
Political factors: The primary political factor that has curtailed the development of CAL has been the hostile political relationship between the People’s Republic of China and Taiwan since 1949. Being a government owned airline has tended to intensify the woes of the organization, due to the restrictions imposed on it by the government of China. Until 2008, these restrictions included a lack of permission to operate on air routes in mainland China, as well as agreements between the Chinese and governments of countries such as Australia and Canada which prevented CAL from directly operating in these countries. Restrictions have been eased considerably since 2008, a move which has allowed CAL to conduct flights between mainland China and Taiwan, increasing the revenue of the organization. However, this may also result in increased competition of Chinese airlines and there is a danger that relations between the two countries could sour at any given moment.
Economic Factors: The global economy has been witnessing a recession that has forced many consumers to either seek out the lowest cost alternative in the market or avoid flying altogether. This has resulted in declining profits for several competitors of CAL such as Cathay Pacific, while CAL has largely managed to balance these economic factors with growth in key business areas, the global economic crisis (if it is further prolonged) may begin to affect the airlines resurgence at some stage. Furthermore, CAL must also deal with the possibility of fluctuating oil and fuel prices a factor which has contributed to financial losses experienced by the organization in the past.
Social: The major social factor that has caused issues for CAL in the past has been its poor safety record which is attributed to its employment and employee training practices. The airlines has managed to develop a reputation as an unsafe airline in the minds of much of Taiwanese and South East Asian society, and this social perception will have to dispelled completely, in order for the organization to ensure a successful future.
Technological: Cal has been quick to adapt to changes in the sphere of information technology particularly in terms of computerizing its sales and distribution strategies, which has drastically reduced costs as well as increasing sales.
Strategic Groups
There are two primary strategic groups operating within the South East Asian airline industry, which is CAL’s primary market. These are full service airlines (FSA), which includes CAL and other competitors such as Cathay Pacific, Singapore Airlines and Taiwan Airlines. FSA’s provide a wide range of services in addition to transport which includes in-flight meals, entertainment and other services. FSA’s tend to charge higher fares than the other strategic group operating in the industry; low cost carriers (LCC’s) such as those operated by the Chinese government. LCC’s tend to offer very basic services which are usually limited to the transport of luggage and passengers and charge relatively low fees. CAL faces competition from both strategic groups and must devise a strategy to combat both.
Industry Survival and Success Factors
The survival of the industry is largely dependent on external factors such as fuel prices and the state of the global economy. However, the increasingly globalised nature of the world makes air travel a necessity and this bodes well for the airline industry. Moreover, the barriers to entry in the industry are extremely high due to exorbitant costs and bureaucratic hurdles involved in setting up an airline; this makes it increasingly difficult for new entrants to enter the industry. However, the power of suppliers is high as there are only two major providers of passenger aircraft and related technology in the world, Airbus and Boeing who are essentially free to set prices and conditions on buyers. The power of buyers is also high due to low switching costs for the buyer, high levels of buyer price sensitivity and the ease of availability for buyers. There are also a variety of substitutes to air travel available particularly in terms of short distance travel, which includes rail travel, bus travel and sea travel for longer distances. The intensity of rivalry and competition in the industry is also extremely high due to the number of firms active in the industry.
QUESTION 2
Throughout its history CAL’s value chain has been configured in a manner which attempts to maximize its cost advantage. The organization has made concerted efforts to maintain this advantage and this can be seen in the many attempts that the organization has made to reconfigure its value chain over the years, by adapting particular activities, implementing structural changes and introducing new distribution channels.
One of the initial drivers of the organization’s rapid expansion was the timing of its market entry, which was at a time when there was little competition for the average Taiwanese air traveler to choose from in terms of both domestic and international travel requirements. This allowed the organization to establish trade routes, partnerships and achieve economies of scale which were crucial in allowing the organization to achieve an early cost advantage.
Another key driver of value creation and important competitive advantage has been the airline’s ability to recognize the limits to its logistical capability and the implementation of strategies and activities that fully utilized existing capacity. Specific inbound logistics related activities of CAL have conformed to this strategy. The selection of routes has been limited to 23 countries so as to not overburden its fleet. Furthermore, CAL’s aircraft acquisition strategy is also in line with the policy of not overburdening existing employee capacity and new aircrafts are only acquired when additional routes are planned or increased traffic is predicted, in a bid to efficiently utilize capacity. Moreover, careful management of capacity utilization is also evident in the company’s outbound logistics related activities. The organization has created partnerships with several airlines in a bid to ensure that its customers can reach their desired destination without needlessly having to add to the company’s fleet or expend additional financial resources, in order to cater to inconvenient routes.
The organization has also managed to successfully revamp operational activities in its value chain, in a bid to maintain its cost advantage. This has included the implementation of online ticketing systems that have allowed customers to book tickets online as well as online check-in systems that offer customers the opportunity to check-in for their flights online. These online networks also allow access to travel agents who can avail the opportunity to book tickets for their customers online. This reconfiguration of operational activities and reduction of physical infrastructure has allowed the organization to both reduce costs and increase sales.
Support activities in the organization are also conducted in a manner which seeks to maximize its cost advantage, in addition to the above mentioned primary activities. Human resource management activities such as pilot training and employee training were initially conducted in a haphazard manner in a bid to save costs, this subsequently lead to widespread condemnation after several disastrous crashes occurred due to pilot negligence and as a result the airline realized that intensive training of pilots would be beneficial in maintaining the firms competitive cost advantage in the long. This resulted in a redesigned HR policy that concentrated on high quality training.
There are however several instances where the organization may have used its key competitive advantages to help them retain core markets such as that of the domestic Taiwanese customer. To begin with, the improvement of the Taiwanese public transport system resulted in the loss of a key customer base for CAL. At that juncture it may have been possible for CAL to implement cost cutting measures that would reduce ticket prices, which would in turn serve to encourage at least some proportion of its domestic travel customers to continue using CAL. Furthermore, there was a possibility of creating partnerships with public transport providers on certain routes.
Positioning itself as a safe and reliable air carrier in the minds of consumers will be critical for the organization in terms of maintaining and improving its competitive position. CAL has had a disastrous history in terms of air traffic safety and has witnessed twelve major plane crashes in its history. These crashes have largely been attributed to preventable human errors and lackadaisical safety inspections that have arisen from insufficient employee training and ineffective controls during safety checks. The root of these problems is possibly a bureaucratic culture of a government organization, which is allegedly less professional. While CAL has begun a process of revamping its organizational structure, more will need to be done particularly in terms of distancing itself from governmental organization culture and the repositioning of the brand as a safe and reliable FSA. The company will need to pay particular attention to the cultural web of the organization. CAL will need to ensure that the stories that are told by employees and other stakeholders are positive and are complementary to the organization. The rituals and routines indulged in by employees will also have to be carefully observed so that they are compliant with the organizations new outlook, which values safety. Similarly, the symbols that represent the organization must also reflect this change in outlook. The organizational and power structure must also be redesigned, in order to reduce emphasis on seniority and hierarchical considerations and instead accord equal respect to all and to assign greater value to honesty and constructive criticism. Lastly, effective controls must be put in place that can effectively monitor these changes in outlook.
QUESTION 3
In the contemporary scenario the two major issues facing CAL stem from firstly, its reputation as an unsafe and unreliable FSA and the increasing competition from LCC’s. In order to counter these threats CAL must formulate specific strategic initiatives and potentially acquire additional resources that will assist the organization in ensuring a prosperous future. Possible options in terms of strategic initiatives have been discussed below.
The major issue of brand reputation is one that is not easy to repair overnight. It will require a concerted strategic response in terms of marketing activities as well as a further renovation of the organization’s structure. CAL’s marketing strategy must place an emphasis on improved safety methods and an acknowledgment of the company’s poor safety record as well as the demonstration of concrete steps that the organization is taking to rectify this. This marketing campaign can also emphasize the fat that air travel remains the safest method of transportation as demonstrate by Figure 1 below.
Figure 1: Fatalities by Transportation Mode (University College Santa Cruz 2003)
Key strategic decisions may involve the allocation of a higher advertising budget which aims to inform potential consumers of the changes that the organization is undergoing. Furthermore, in order to improve CAL’s safety record in practical terms, it may need to acquire a new safety and inspections department that will be equipped with all required materials. The employees that are assigned to this department must demonstrate a clear commitment to safety and a flawless performance record.
The threat from LCC’s may be countered by employing a more nuanced pricing strategy that recognizes the requirements of each customer. CAL must segment its customer base and differentiate between those that require the additional services that an FSA offers from those who require no frills transport and offer packages to both of these groups depending on their needs. It may also choose to offer exclusively FSA or LCC services depending on the length of the route.
The success or failure of these strategic initiatives can be determined using the RACES criteria. In terms of the availability of resources required to implement these initiatives, the organization has been showing high levels of profitability through the past decade and accumulated profits maybe sufficient in hiring new employees for the safety inspections department and the launching of a mass media advertising campaign.
Safety improvement initiatives will be acceptable to all relevant stakeholder groups, however cost cutting initiatives designed to compete with LCC’s may have an adverse impact on relationships with certain stakeholder groups such as business and executive class travelers who will feel that the airlines reputation will be tarnished by indulging in low cost operations. The coherence of the overall organizational strategy may also be influenced in that attempts of the organization to position itself as an FSA and high quality provider of air travel services will be contradicted by offering LCC services. The effectiveness of the cost cutting initiative may also be questions keeping in mind that CAL may not have further scope for cost cutting. It may also be difficult to maintain a cost advantage with regards to LCC’s due to the scale of CAL’s operations.
The above mentioned proposed strategic initiatives have been designed with the aid of a SWOT analysis. It was found that the organizations primary strengths lie in its ability to maintain a cost advantage as well as its reputation as Taiwan’s national carrier. This has enabled the organization to fly to diverse regions while keeping costs low. The major opportunity currently available to the organization is the opportunity to capture a significant share of the LCC market, which is a possibility for CAL due to the extent of its cost advantage. The major weakness of CAL has been its abysmal safety record, the legacy of which can be gradually controlled using the marketing and organizational restructuring initiatives mentioned above. Lastly, CAL’s primary threat is one that is posed by LCC’s and an aggressive expansion into the LCC market will be an attempt to convert a threat into an opportunity.
REFERENCES
Samanta, M., & Faheem, H. (2010) Problems at China Airlines, case, ICMR: Center for Management Research.
