What’s Happening?!What’s Happening?!

The Apple Macintosh is 20 years old!

Apple’s audacious machine is still taking chances at 20.

Steve Jobs’ personality, values inseparable from the Apple saga.

In an era where bean counters and marketeers call the shots. Steve Jobs is the last Big Kahuna still standing.

Chapter 2 SummaryChapter 2 Summary

Business Competitive Business Competitive

EnvironmentEnvironment

Chapter ObjectivesChapter Objectives

Defining competitivenessDefining competitiveness Competitive ModelCompetitive Model

– Competitiveness: A Link to National GoalsCompetitiveness: A Link to National Goals Competitive Advantage of NationsCompetitive Advantage of Nations

– Diamond of National Advantage ModelDiamond of National Advantage Model Role of GovernmentRole of Government

DefinitionDefinition

““Competitiveness:Competitiveness:

The degree to which a nation can, The degree to which a nation can, under free and fair under free and fair market conditionsmarket conditions, produce good and services that will meet , produce good and services that will meet the test of international markets while simultaneously the test of international markets while simultaneously maintaining or expanding the real income of its citizens.”maintaining or expanding the real income of its citizens.”

Competitiveness: A Link to National GoalsCompetitiveness: A Link to National Goals

HumanResources

Capital

Technology

ImprovedDomestic

Performance

More andBetter Jobs

IncreasedStandard of

Living

StrongerNational Security

DecreasedBudgetDeficit

TradePolicy

NewCompetition

Increased World Market Competitiveness

ReducedTrade Deficit

How to Gain a Competitive Advantage?How to Gain a Competitive Advantage?

Provide value to the customerProvide value to the customer Right strategies - achievable and sustainable Right strategies - achievable and sustainable

over time over time Know products and servicesKnow products and services Know customersKnow customers Know competitorsKnow competitors

The Diamond of National AdvantageThe Diamond of National Advantage

Firm Strategy, Structure and

Rivalry

Factor

ConditionsDemand

Conditions

Related and Supporting Industries

Chance

Government

Role of GovernmentRole of Government

Serve as a catalyst and challengerServe as a catalyst and challenger Encourage companies to raise level of Encourage companies to raise level of

expectations - higher level of competitive expectations - higher level of competitive performanceperformance

Do anything that would promote Do anything that would promote unrestrained competition unrestrained competition

QuestionsQuestions

1. 1. In order for companies to achieve and sustain a In order for companies to achieve and sustain a competitive advantage, what would a possible competitive advantage, what would a possible action plan include?action plan include?

2. 2. For a government to perform effectively in its role For a government to perform effectively in its role as a catalyst and challenger, what objectives as a catalyst and challenger, what objectives should governments aim to accomplish?should governments aim to accomplish?

Chapter 3 SummaryChapter 3 Summary

The Porter Competitive Model for The Porter Competitive Model for Industry Structure AnalysisIndustry Structure Analysis

Competitive ModelCompetitive Model

Understand and Evaluate:Understand and Evaluate:

– Business environment structure of an Business environment structure of an industry.industry.

– Threats of competition to a specific Threats of competition to a specific company.company.

Porter Competitive Model

Intra-Industry Rivalry

Strategic Business Unit

BargainingPower

of Buyers

Bargaining Power

of Suppliers

Substitute Products

and Services

PotentialNew Entrants

Figure 3-1

Source: Michael E. Porter“Forces Governing Competition in IndustryHarvard Business Review, Mar.-Apr. 1979

Porter Competitive Model Porter Competitive Model ComponentsComponents

Intraindustry RivalryIntraindustry Rivalry Bargaining Power of BuyersBargaining Power of Buyers Bargaining Power of SuppliersBargaining Power of Suppliers Threat of New EntrantsThreat of New Entrants Threat of SubstitutesThreat of Substitutes

Primary and Supporting StrategiesPrimary and Supporting Strategies

Differentiation Strategy (Primary)Differentiation Strategy (Primary) Low Cost Strategy (Primary)Low Cost Strategy (Primary) Innovation (Supporting)Innovation (Supporting) Growth (Supporting)Growth (Supporting) Alliance (Supporting)Alliance (Supporting)

Porter Value ChainPorter Value Chain

Basic Concept:

1. Deals with core business processes.

2. Enables tracking a new idea to create a new

product and/or service from origination all the

way to customer satisfaction.

Generic Porter Value ChainGeneric Porter Value Chain

INBOUNDLOGISTICS

OPERATIONS OUTBOUNDLOGISTICS

MARKETING AND SALES

SERVICE

PRIMARY ACTIVITIES

PROCUREMENT

TECHNOLOGY DEVELOPMENT

HUMAN RESOURCE MANAGEMENT

FIRM INFRASTRUCTURE

SU

PP

OR

T A

CT

IVIT

IES

Figure 3-6Adapted with the permission of the Free Press, an imprint of Simon & Schuster Inc.. from COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance by Michael Porter. Copyright © 1985 by Michael E. Porter.

Possible Exam QuestionsPossible Exam Questions

1.1. What is the objective in using the Porter What is the objective in using the Porter Competitive Model?Competitive Model?

2.2. How does the Value Chain differ from the How does the Value Chain differ from the Porter Competitive Model?Porter Competitive Model?

Chapter 4 IntroductionChapter 4 Introduction

Airline Industry AnalysisAirline Industry Analysis

Key PointsKey Points

Lessons Learned from Profitable Airlines sLessons Learned from Profitable Airlines s Analysis of the Airline Industry using the Analysis of the Airline Industry using the

Porter Competitive ModelPorter Competitive Model Airline Industry Business Strategy ModelAirline Industry Business Strategy Model Importance of IT in the IndustryImportance of IT in the Industry American Airlines as a Profile AirlineAmerican Airlines as a Profile Airline

Still Consistently Profitable AirlinesStill Consistently Profitable Airlines

Southwest AirlinesSouthwest Airlines

Aircraft Utilization, focus on city pairs, corporate culture, cost savings Aircraft Utilization, focus on city pairs, corporate culture, cost savings in reservationsin reservations

Singapore AirlinesSingapore Airlines

Geographic Locations, National Strategies, Shrewd Management and Geographic Locations, National Strategies, Shrewd Management and

Leadership in IT, Competitive StrategiesLeadership in IT, Competitive Strategies

British Airways has run into problems in recent years!

Porter Competitive ModelPorter Competitive Model

Intra-Industry RivalrySBU: American AirlinesRivals: United, Delta, US Air,Northwest, Southwest

BargainingPower of Buyers

Bargaining Power

of Suppliers

Substitute Products

and Services

PotentialNew Entrants

Airline Industry Analysis - North American Market

•Travel Agents •Business Travelers•Federal Government•Pleasure Travelers•Charter Service•U.S. Military•Cargo and Mail

•Alternate Travel Services•Fast Trains•Boats

•Private Transportation•Videoconferencing•Groupware

•Aircraft Manufacturers•Aircraft Leasing Companies•Labor Unions•Food Service Companies•Fuel Companies•Airports•Local Transportation Service •FAA•Hotels

•Foreign Carriers•Regional Carrier Start ups•Cargo Carrier Business Strategy Change

Figure 4-2

Airline Business Strategy ModelAirline Business Strategy Model

Make note of the fact that the example Make note of the fact that the example

in the textbook is not well done.in the textbook is not well done.

Airline Industry StrategiesAirline Industry Strategies

EuropeEurope N. AmericaN. America Pacific RimPacific Rim Latin AmericaLatin America

AlliancesAlliances IndependentIndependent

Markets

Routes and Route Structure

Short HaulShort Haul Long HaulLong Haul

Hub and SpokeHub and Spoke Point to PointPoint to Point

Low FaresLow Fares Premium FaresPremium Fares

Fare Strategy

Company Structure

Information Systems

Customer Systems Operational Systems Logistical Systems Business SystemsCustomer Systems Operational Systems Logistical Systems Business Systems

Scheduled Flights Chartered Flights Air Freight Mail

Products/Services

Business Travelers Personal Travelers Seniors Families Government

Customers

American AirlinesAmerican Airlines

Has historically been the largest airline in Has historically been the largest airline in the world in terms of revenue and number the world in terms of revenue and number one in the U.S.one in the U.S.

A premium service carrier.A premium service carrier. Hub and Spoke SystemHub and Spoke System SABRE SystemSABRE System Financial losses same as most other carriersFinancial losses same as most other carriers

IS in American AirlinesIS in American Airlines

Industry Leader in ISIndustry Leader in IS Convenience to CustomersConvenience to Customers Knowledge of CustomersKnowledge of Customers Providing a Foundation of Other SystemsProviding a Foundation of Other Systems Building a Base for other BusinessBuilding a Base for other Business

ConclusionsConclusions

Still a clearly defined industry.Still a clearly defined industry. Information Systems play a vital role in the Information Systems play a vital role in the

industry.industry. The industry is greatly affected by many The industry is greatly affected by many

factors.factors. Strategies dictated by the market are Strategies dictated by the market are

important. important.

Chapter 4Chapter 4

Porter Competitive Model Porter Competitive Model

and and

the Airline Industrythe Airline Industry

2003 - A Hundred Years of 2003 - A Hundred Years of FlightFlight

Aviation is celebrating its centennial year. From its first brave beginnings the civil aviation industry remains dynamic and although some of the priorities have changed, the spirit and passion remain.

Some priorities are not new: safety, the need for efficient operations, adequate capacity to meet growth and, of course, customer satisfaction. Other priorities have gained prominence in recent years – security, war risk insurance and environmental concerns – and will remain important in the coming years.

This industry is always in the

grip of its dumbest competitors.

Robert CrandallFormer CEOAmerican Airlines

We must look at the world as it is versus how airlines would like it to be.

Robert L. Crandall

And as government officials, politicians and consumers would like it to be.

Airline Industry GoalsAirline Industry Goals

Public Service. (Service to Customers)

Return to Investors.

Country Strategic Resource.

Are these consistent or in frequent conflict?

Airline ProfitabilityAirline Profitability

In order to survive and profit in this tough environment, airlines attempt to manipulate three main variables:

Cost, calculated as total operating expenses divided by available seat miles (ASM)

Yield, calculated as total operating revenues divided by the number of revenue passenger miles (RPM)

Load Factor, calculated as the ratio between RPMs and ASMs, which measures capacity utilization.

Profitability = [yield X load factor] - cost

United Flight 815 United Flight 815 Chicago to LAX, October 31, 2001

204 tickets were sold and 186 people showed up.

68 passengers originated in Chicago and 118 were from connecting flights.

97 passengers terminated at LAX, 89 continued on another flight.

Of the 33 passengers that were only Chicago-LAX there were 27

different fares:

• A frequent flyer passenger paid nothing.

• A 1st class passenger paid $1,248.51 on the day of the flight.

• A coach passenger paid $102.26 on the day of the flight.

• A cash fare passenger paid $87.21 twenty-nine days in advance .

The National Commission to Ensure a The National Commission to Ensure a Strong Competitive Airline IndustryStrong Competitive Airline Industry

Change, Challenge and Change, Challenge and CompetitionCompetition

A Report to the President and CongressAugust 1993

Airline Industry ReportAirline Industry Report

The air transportation system has The air transportation system has

become essential to the economic become essential to the economic

progress for the citizens and progress for the citizens and

businesses of this nation.businesses of this nation.

The commission questioned some of the most basic assumptions that have formed the foundation of policy toward this industry--and behavior within it--for the past half century.

It also questioned whether the

airline industry has basic structural

problems or if it is just a collection

of poorly managed companies.

Commission Findings

• The Airline Industry is more competitive than before deregulation in 1978.

• Travelers and shippers are charged less than in 1978.

• The Airline Industry has never made a sustained, substantial return on investment.

• It lost huge amounts of money from 1990 to 1993.

• It canceled many aircraft orders shortly after an unprecedented buying binge.

• Its freedom to compete in international markets is uncertain because of government restrictions.

Commission Conclusions

For the U.S. to prosper in a global marketplace the airline industry must: • Be efficient and technologically superior.

• Have the financial strength to respond to rapid change and opportunity.

• Efficiently move people, products and services to markets, wherever they exist.

Recommendations

Efficiency: Reinvent the FAA.

Financial Health: Deal with factors that impact the financial health of the industry.

Access to Foreign Markets: Replace the current bilateral system with a multi-national regime.

To return their balance sheets to respectability, most airlines would have to achieve profit margins that are almost unprecedented in their history, and sustain those margins for years.

September 11 ImpactSeptember 11 Impact

An absolute disaster for the industry.

1990-1993 Was a Disaster!1990-1993 Was a Disaster!

The Gulf War. The general decline in the world economy. Aircraft fuel price increases. Wages, work rules and work patterns. Chapter 11 bankruptcy airlines. Excess capacity. A very capital intensive business. Too many years as regulated airlines.

Airline IndustryAirline Industry

The shock of September 11th has forced airlines to face an awkward fact: in some respects, aviation is a declining industry.

Nov. 22, 2001

The Economist

Decline in Air TravelDecline in Air Travel

At Thanksgiving in 2000 a record 2.2 million Americans took a flight to spend the holiday with family and friends.

Air traffic in October and November 2001 was down by about 25% compared to the previous year in the world's biggest aviation market, thanks to a combination of economic recession and the attacks on September 11th.

International TravelInternational Travel

International travel from America has been hit even harder: the number of Americans flying across the Atlantic was down by over 30%.

Never mind that more people are killed on America's roads every three months than have died in the entire history of commercial aviation.

Fatalities by Transportation Mode

0 5000 10000 15000 20000 25000

Passenger Car

Railroad

Airline 12

530

20,818

Load FactorsLoad FactorsDespite cutting capacity, the big American airlines are still flying with planes barely 60% full—a figure that would be much lower were it not for hefty discounts.

Boeing and Airbus, the two manufacturers of large jetliners, are offering airlines special financing deals to pay for their purchases in order to stave off outright cancellations.

The last time the airlines were in such straits, during the Gulf war and recession in 1990-92, it took them four years to return to profit, even though traffic recovered within a year.

European AirlinesEuropean AirlinesThe situation in Europe is no better.

Two flag carriers, Swissair and Sabena, have collapsed since the terrorist attacks.

Other big carriers, such as British Airways (BA) and KLM, are in major financial trouble.

Traffic within Europe fell by over 10% in September and October 2001, while traffic from Europe to America and Asia fell by 35% and 17% respectively.

Looking for OptionsLooking for Options

In most industries, such a situation would quickly lead to mergers. But this is not so easy for airlines, hemmed in as they are by national ownership rules and rigid international regulation of routes.

America's airlines are retreating to their strongholds in the hub airports they dominate, such as Dallas-Fort Worth (American) and Atlanta (Delta).

Most airlines have cut at least one “wave” of coordinated flights in and out of their hubs.

Dropping Point-to-Point FlightsDropping Point-to-Point Flights

The biggest effect has been for airlines to drop non-stop “point-to-point” flights rather than those that go through hubs.

The network economics of hubs becomes more attractive for big carriers when times are tough.

A study of America's changed airline-route map shows that large carriers are cutting non-stop flights to cities where they do not operate hubs by more than they are trimming hub flights.

Unions and Vendors Unions and Vendors

The industry's woes have forced airlines to get tough with unions and suppliers over restrictive practices that raise their costs.

US Airline Industry Must US Airline Industry Must Restructure or DieRestructure or Die

Aviation Week & Space TechnologyAviation Week & Space TechnologyNovember 2002November 2002

Low-Cost Airlines, Not September 11, Have Transformed Industry Fundamentals

"When people say the traditional industry model is broken, they are moving their jaw without putting their brain in gear," responds former American Airlines CEO Robert Crandall. He added that he is skeptical that the industry will ever be competitive as long as there are so many carriers selling what has evolved into a commodity product.

Aviation Week ContentionsAviation Week Contentions

A collapse in pricing power and a fundamental shift in the buying behavior of business travelers, coupled with fierce competition from low-cost airlines, is forcing U.S. major hub-and-spoke carriers to restructure their operations or face the prospect of eventually going out of business.

The crux of the problem is a combination of excessive costs in relation to carriers' current and projected revenues, an imbalance between the supply and demand for available airline seats, and an inability to boost air fares.

Corrective ActionsCorrective Actions

It will take much more than concessions by labor for major U.S. airlines to solve their financial problems.

Airline Industry US Market Airline Industry US Market ShareShare

Based on current trends, the domestic market share held by the six major US airlines (American, Continental, Delta, Northwest, United and US Airways) plus Alaska Airlines will drop from 75% in 2002 to 62% in 2010—and 45% by 2020, according to an industry projection.

Southwest could pass American to become the largest U.S. airline by 2013, and JetBlue could pass Delta to become the third largest by 2020.

Industry Structure ProblemsIndustry Structure Problems

The fact that low-cost carriers have been able to mature this far says as much about what's wrong with the majors as it does about what's right with their low-cost counterparts, and begs the question: does the underlying strategy or business model employed by the large hub-and-spoke airlines still work?

Analysts and other industry observers believe it does, but to function properly carriers must reduce their costs and restore the balance between supply and demand.

A Sobering FactA Sobering Fact

Before September 11, 2001, the global industry was showing a net loss on international services of around $3 billion.

Corrective ActionsCorrective Actions

• Reduced capacity.

• Older aircraft may never return to service.

• Reduced wage pressures.

• Continued joint agreements.

• Discounted tickets and more travel packages.

Code Sharing AgreementsCode Sharing Agreements

The US Transportation and Justice Departments approved a pact that will let Delta Air Lines, Continental Airlines and Northwest Airlines share access to each other's routes.

The code-share agreement allows each carrier to market the others' routes as its own. One Northwest flight, for instance, might also have a Continental flight number and a Delta flight number.

The agreement is the biggest in the industry. US Airways and United Airlines have a similar agreement.

Code Sharing AgreementsCode Sharing Agreements

It's an especially appealing arrangement to frequent fliers who prefer to build up miles on one airline while flying all three.

The government placed several conditions on the deal. Specifically, the DOT said 60 percent of any new code-sharing routes must serve those areas of the country that are considered under-served.

It also bans anti-competitive practices like coordinated pricing or shared decisions about route planning and capacity.

Continuing ConcernsContinuing Concerns

1. Fuel costs

2. Decisions regarding passenger services like whether to charge for food, the need for more electronic capabilities.

3. Upgrading aircraft.

4. Route strategies.

5. Union relations.

6. Relations with travel agents.

Porter Competitive ModelPorter Competitive Model

Intra-Industry RivalrySBU: Southwest Rivals: American, United, Delta, US Air, Northwest

BargainingPower of Buyers

Bargaining Power

of Suppliers

Substitute Products

and Services

PotentialNew Entrants

Airline Industry Analysis - North American Market

•Travel Agents •Business Travelers•Federal Government•Pleasure Travelers•Charter Service•U.S. Military•Cargo and Mail

•Alternate Travel Services•Fast Trains•Boats

•Private Transportation•Videoconferencing•Groupware

•Aircraft Manufacturers•Aircraft Leasing Companies•Labor Unions•Food Service Companies•Fuel Companies•Airports•Local Transportation Service •FAA•Hotels

•Foreign Carriers•Regional Carrier Start ups•Cargo Carrier Business Strategy Change

Figure 4-2

Benefits of Information Systems

to American Airlines

1. Convenience to Customers.

2. Knowledge of Customers.

3. Providing a foundation for other

systems.

4. Building a base for other businesses.

Four Three Consistently Profitable Four Three Consistently Profitable AirlinesAirlines

1. Singapore Airlines1. Singapore Airlines

2. Cathay Pacific2. Cathay Pacific

3. British Airways3. British Airways

4. Southwest Airlines4. Southwest Airlines

Singapore AirlinesSingapore Airlines

Consistently profitable but experiencing profit pressures. Winner of multiple awards for “airline excellence.” An extension of the country strategy to be the business and

travel gateway to Southeast Asia. An impressive travel infrastructure. Leader of the Orient Airlines Association (OAA)

– Abacus reservation system.

– Price collusion on major routes. Nervous regarding U.S. carrier price competition.

Why SIA is So Good!Why SIA is So Good!

• Clarity and Commitment (to customer service).

• Continuous Training.

• Internal Communications. • Consistent External Communications.

• Connection with Customers.

• Benchmarking.

• Rewards and Recognition.

• Professionalism, Pride and Profits.

Southwest AirlinesSouthwest Airlines A U.S. carrier success story. Commuter airline that concentrates on city pairs.

(Average flight is 400 miles or less and takes less than one hour)

CEO Herb Kelleher, a Connecticut attorney turned Texan, had the best labor relations in the industry and an excellent company culture.

Lowest cost structure in the industry. Company vision was to provide low cost airline service

to an increasingly larger number of people. Objective to minimize reservation costs.

A Strength of Southwest A Strength of Southwest AirlinesAirlines

1. Focus.

2. Focus.

3. Focus

Best Airlines for Business TravelersBest Airlines for Business Travelers

1. Singapore Airlines2. Swiss Air3. Cathay Pacific4. Midwest Express **5. Japan Airlines6. Quantas7. ANA8. Virgin Atlantic9. Lufthansa10. KLM-Royal Dutch

11. Finnair

12. British Airways

13. Alaska

14. Air France

15. Varig

16. Aer Lingus

17. Kiwi

18. Air Canada

19. American **

20. Delta**

Source: Zagat Survey of Frequent Flyers

Deregulated But Very RegulatedDeregulated But Very Regulated

Safety factors.

Air traffic controllers.

Impact on constituents.

International routes.

Airline AlliancesAirline Alliances

The Star Alliance is the largest of the major groupings. Consisting of 15 airlines led by United Air Lines and Lufthansa. Star serves about 815 destinations in more than 130 countries.

Oneworld, which is eclipsed by only Star among the major airline alliances, is led by British and American Airlines. Eight airlines offer service to 550 destinations in more than 130 countries.

SkyTeam is quickly becoming a major alliance player by serving more than 450 destinations in nearly 100 countries. Led by Air France and Delta, SkyTeam has also consolidated cargo services.

Barriers to EntryBarriers to Entry

Access to airports continues to be impeded by:

(1) Federal limits on takeoff and landing slotsat the major airports in Chicago, New York, and Washington

(2) Long-term, exclusive-use gate leases

(3) “Perimeter Rules” prohibiting flights at New York’s LaGuardia and Washington’s National airports that exceed a certain distance.

Airline Industry Conclusions Airline Industry Conclusions

It is a vivid example of the dynamics of the markets that it serves.

Establishing strategies dictated by the market is critical.

Once the right strategies have been identified, information systems can play an important supporting role.

Possible Exam QuestionsPossible Exam Questions

1. Identify an industry where information systems act as a

significant barrier to entry and explain the significance of this

barrier.

2. Identify and explain the two basic strategies and three

supporting strategies used by intra-industry rivals.

3. What is the primary benefit to be derived through the use of

the Porter Value Chain?

4. Explain the logic and growth as a competitive strategy and provide two company examples where this was a key

strategy.