As A Strategic Management Consultant
As a Strategic Management Consultant, Southwest Airlines is requesting for strategic analysis of the airline industry in Ghana. This is part of their 2016 strategic decision to enter into the West African market with Ghana as a hub. Flying Accra-New York-Accra. Southwest Airlines is poised to compete with Delta Airlines market share.
1. Formulate and design an appropriate strategic framework for the analysis and justify it.
The strategic framework that would be used for analyzing the airline industry in Ghana for Southwest Airlines is shown in the Figure 1. 0.
Figure 1. 0: Strategic framework for analyzing the airline industry in Ghana
The framework is designed to focus on both macro and micro level analyses.
Macro level analysis deals with the external environment within which South Airline wants to operate. The following frameworks are employed to do the analysis.
The PESTEL analysis deals with the impact of political, economic, social, technological, physical environmental factors on strategy. Political factors both home and abroad cannot be ignored; the political stability of Ghana needs to be considered. As Southwest Airline, by its policy, does not operate in a dictatorship, the political atmosphere in Ghana needs to be well analysed and measured. For example, the issue of terrorist threats in the sub-region in the past few years, and efforts by the national governments to dealing with the problem is very critical to be considered. Similarly, with 2016 as an election year, it is prudent for the strategic analysis to capture this political process and the effect it would have on the strategic decision of the airline.
Besides, both the Ghanaian economy and the global economy and their impact need to be analysed, and the important components are the inflation and interest rates in Ghana; income levels of the people, the nation’s gross domestic product. PESTEL scan would reveal that with the discovery and subsequent production of oil, there are increased opportunities for the airline industry in Ghana.
Also, the socio-cultural elements which influence the way the people of Ghana need to analysed as a way to understand how the people respond to social infrastructure of the market place. Thus values and attitudes, education, healthcare and language are a few of the variables to be considered in the strategic analysis.
Further the technological factors need to be analysed and these include the level of technological development in the country, the speed of technological change and adoption.
Moreover, the physical environmental factors such as the climate, laws on environmental protection could affect the strategic decision.
Another important factor is the legal system is Ghana, and the key components include the regulatory bodies such as Ghana Aviation Authority and the functioning of the criminal-justice system, and consumer protection laws.
Porter’s Five Forces Framework
In designing a strategic framework for the Southwest strategic decision to compete in the airline industry in Ghana, Porter’s Five Forces framework is also relevant here. The five forces, threat of new entrants to the Ghanaian airline industry, the bargaining power of suppliers and customers of the airline industry, threat of substitutes to the products and services offered by the airline industry and the intensity of rivalry among the competitor already in the Ghanaian airline industry, need to be analysed. This framework for example would help Southwest to determine whether there are low or high barriers to entry to the industry; threat of other substitutes that could affect the competitive advantage of Southwest, and a number of other factors such as, Ghana’s aviation laws and policy. The components of each of the five forces are to be measured on a scale of ‘low’, ‘medium’ and ‘high’ to help Southwest Airline to determine whether it is attractive entering the airline industry to compete with Delta’ market share.
The Resource-Based View
Apart from the macro level analysis, Southwest airline would need to do internal audit of its strategic resources and competences to inform its strategic decision of competing with Delta airline. That is there would be the need to determine the adequacy and suitability of the resources and competencies of Southwest for it to be able to compete with the Delta airline. Resources, both tangible and intangible, include capital equipment, the skill of individual employees, finance, skillful managers, reputation/brand and level of technology. The evaluation of these resources would help provide the basis for Southwest’s future competitive advantage. The evaluation would help Southwest to identify the core competences and the unique resources it has that are imitable or unavailable to Delta airline, which it could use to gain competitive advantage. This evaluation can done through the Value Chain Analysis developed by Micheal Porter (1979).
The important strategic information from both the environment and the internal operations of Southwest would be summarized in the form of Strengths, Weaknesses, Opportunities and Threats (SWOT). The SWOT analysis brings together, the strengths and weakness of Southwest as far as its internal operations, products, processes and resources are concerned, while the opportunities in and threats from the external environment would be brought together. For the strengths of Southwest, strategies would be needed to be put in place to consolidate them, and for the weakness, there should measures to convert them into strengths. Similarly, Southwest would have to take advantage of the opportunities identified in the environment while putting strategies in place to minimize the impact of the external threats on its overall strategy.
Justification for the Strategic Framework Developed
The justification for using PESTEL, Porter’s Five Forces, Resource Base View and SWOT analysis is presented below.
Every business organization operates in an environment and has interdependent interaction with it. What happens in the organisation’s environment has either positive or negative impact on its internal processes. It is therefore prudent to consider the external environment in developing a strategic framework for Southwest Airline. The September 11 terrorist attack in the United States was an external phenomenon to many airline companies, yet such a mishap undoubted affected the internal operations of many airlines, including Southwest.
Similarly, the Porter’ Five Forces framework is also included to provide an understanding of the industry structure of the airline, and to gauge the attractiveness or otherwise of the respective airline industry.
For an organization to take advantage of external opportunities, it must have the internal capabilities to do so. Similarly, threats in the environment could be reduced if the organization has adequate capabilities internally. Therefore the resource based view helps to consider the resources that an organization has or requires internally for it to survive and compete well.
The SWOT analysis’s inclusion is grounded on the belief that every organization has strengths and weaknesses, and opportunities and threats from its environments. Thus the evaluations of these variables are essential for the organization to put in place pragmatic measures for addressing both external and internal challenges.
Thus, the entire strategic framework developed aims for a comprehensive strategic analysis of the airline industry for Southwest airline to have competitive advantage over Delta Airline.
2. With Porters’ Five Forces Analysis, assess the attractiveness of the airline industry in Ghana.
According to Johnson et al. (2008), Porter’s Five Forces Framework was originally developed to assess how attractive an industry is in terms of potential for profit of different industries. For every industry, the five forces framework thus constitutes the structure of that industry.
The five forces framework is made up the following: the bargaining power of suppliers of inputs into the industry; the bargaining power of buyers of the industry’s products or services; the threat of new entrants into an industry; the threat of substitute products and services to the industry’s products or services; and the extent of rivalry between competitors in the industry.
The threat of new entrants
The ease with which new competitors can enter the industry clearly has effect on the degree or extent of competition. The entry barriers are the factors or hurdles that need to be overcome by new entrants if such newcomers are to become successful in competing in the industry with the existing competitors. High barriers to entry are good or an advantage for existing competitors, because such barriers high shield them from new threats of new competitors entering to take a share in the industry.
Largely, existing competitors who have reached large-scale production enjoy economy of scale that comes with producing in large volumes. In large volume production, per unit cost of production is less compared to per unit cost in small volumes of production. Thus new entrant will have high per unit cost until they match the volume produced by existing competitors in the industry. Where industry entry investment requirements are high for example in capital equipment cost and research cost, the scale influence becomes more critical. Similarly, experience curve also contributes to the entry barriers to an industry. Where the incumbent competitors have gained a lot of experience for being in the industry for long, they have learnt to do things in more efficient way than the new entrants. Johnson et al. (2008) explain that until the new comer has gained similar experience over time, it faces the challenge of producing at higher cost. The authors however point out that new or changing ‘business models’ can alter the impact of scale of production or render a particular kind of experience redundant.
Also, where in an industry, existing competitors have control over the supply or distributions channels, such a situation contributes to making it difficult for new entrants to the industry. The control can be in the form of directly owning the channels, or the loyalty enjoyed from suppliers.
The laws and other legal restraints regulating an industry can either encourage or prevent new entrants to an industry. Thus, if the legal regime is such that new entrants can easily enter an industry. Patent protections, market regulations and direct government actions are all issues affect the entry of new comers into an industry.
Besides, the belief on the part of a firm that it will face retaliation from existing one can also be a factor to prevent it from entering the industry. Price war, for example, could be form retaliation from incumbent firms.
Furthermore, if competitors in an industry are highly differentiated, it reduces the ability of new competitors to enter the industry, due to increased loyalty of customers to the product of existing competitors in the industry.
Bargaining power of suppliers of inputs
Suppliers are organisations or individual supply the firm with the inputs needed to produce the product or service. Johnson et al. indicate that the inputs include fuel, equipment, raw materials, labour and financial sources. The factors increasing supplier power are the converse to those for buyer power. There is concentration of suppliers, where there are few producers dominating supply, the power of supplier is high. Also if the cost associated with switching suppliers disruptive or expensive, then the business organization or the focal company finds itself in a weak position in the bargaining with the supplier. Similarly, suppliers possess increased power if they are able to cut out buyers who themselves function as intermediaries in the supply chain. In this way, suppliers are able to deal directly with customers in what is termed as forward integration. Thus increased power of suppliers can make inroads into the potential profits of their buyers.
The Bargaining power of customers
Businesses exist to meet the needs of buyers (customers) and also important entity to consider when analyzing and industry. Where there are few large buyers, where buyers can easily switch from one competitors product to another with low cost incurred, they generally have high bargaining power over the business organization. Similar, if an industry such that buyers has some facilities to supply itself what it should buy from the business organisation, the ultimate buyer is deemed to have a lot of power and can lower the profit of the industry.
Besides, the existence of high barriers to exit has the tendency to heighten rivalry, particularly in industries that are declining. High exit barriers may be due to high cost of redundancy, or huge investments made in specific assets, for example, plant and equipment that would be difficult to sell out to others.
Another facto of competitive rivalry in an industry is the degree of differentiation in the products of competitors. Is competitors in an industry are producing standardized products with little differentiation, competitions becomes keen since there is little to block customers or buyers from buying competitors’ products. In other word, low differentiation does not make customers loyal to a particular competitor’s product and have low switching costs. Thus, price-based competitive strategies become the order of the day.
Threat of Substitutes
Substitutes are products or services, which by different process, provides a similar benefits to an industry’s products or services. Substitutes are capable of reducing demand for a particular category of products as customers switch to alternatives. Substitute products in one way or the other put a cap on the prices that could be charged on products and services in an industry. The effect of substitution on an industry is critical if the ratio of performance or price to the incumbent competitors’ products and services is high. Threat of substitutes offers manager with an insight of looking beyond the industry to take into account distant threats as well as constraints. An industry is less attractive is there are more threat that can come from substitute products and services.
Competitive rival organisations sell similar products and services and thus have the same aimed at the same group(s) of customers as their aim. Competitive rivalry is high in an industry where competitors are about equal in size. In this case each competitor would want to dominate the market. However, if there were one or two dominant competitors with the rest being smaller competitors, the rivalry is less intense. Similarly, where the industry experiences low growth rate, any growth is likely to be to the disadvantage of the rival, and thus will be met with fierce resistance.
Where the fixed cost in an industry is high regarding investment in capital equipment or initial research, companies increase the volume of their production and reduce prices. This alerts competitors to do same and this triggers price wars which negatively affects everyone in the industry.
Threat of new entrants; threat of Substitute Products; power of buyers and power of suppliers, according Johnson et al (2008), impinge on the competitive rivalry in an industry.
Essentially, Porter’s forces framework teaches that if the five forces are rated as high regarding an industry, then such an industry is not attractive to compete in because the competition would be too intense to offer reasonable profits.
Analyzing the Airline industry in Ghana using Porter’s Five Forces Framework
Threat of new entrants to the airline industry
In term of threat of entry of new competitors into the airline industry, the increase in the number of new entrants to the industry seems to indicate the entry barriers are not high to discourage new entrants. But the increase has not been tremendous. The liberalization of the airline industry in Ghana also appears to encourage more new entrants. According to news item dated November 5, 2011, on Ghana News Agency’s Website, liberalization of the market has been found to be one of the factors giving rise to poor performance of the airline industry of the sub-region. In terms of scale and experience curve, there existing airlines do not have absolute advantage. New entrants may also have the same scale of service and experience, since there are many other airlines which operate elsewhere in the world with cutting-edge services. Similarly, the service offering of airlines in Ghana such as Lufthansa, KLM, Kenyan Airways, British Airways and Delta airlines are not so differentiated. According to World Investment News (1999), of the several airlines in Ghana, KLM has the largest passenger airlift of 28,000; British Airways close to 26,000 and Swiss Air takes 14,000.
In terms of access to supply channels, the existing airlines in Ghana do not have much control over or not have exclusive control over, the supply of inputs key inputs such as aviation fuel, supply of aircrafts. However, huge capital investment requirement is major factor of raising the entry barrier for new entrants.
The Bargaining Power of Suppliers
The major suppliers in the airline industry include manufacturers of aircraft and spare parts, suppliers of banks, aircraft lessors, airports and providers of aeronautical infrastructure.
The suppliers in the airline industry in Ghana can be said to be wielding a substantial amount of bargaining power since they are few. Manufacturers of aircrafts require huge amount of resources for investment, and require extensive use of sophisticated technology that is not available to many, and thus they are highly concentrated. Aviation fuel suppliers are also concentrated due to government regulation of oil products in the country, and thus have a lot of bargaining power. There is only one major international airport in Ghana. As a result, providers of aeronautic infrastructure wield a lot of bargaining power in the airline industry in Ghana. Pagliari (2008) indicates that the strongest players in the air transport are the airports and have a lot more power in cities or regions served by only one airport. Similarly, lessors, who are intermediaries between aircraft manufacturers and operators are less concentrated, and thus proportionally, have less power than aircraft manufactures.
The bargaining Power of Buyers
The airline customers can be segmented into business travellers and passengers travelling for other purposes. Corporate business travellers are known to be less sensitive to price than other air travellers but other aspect of travel such as period of the year, destination time of stay at destination. In Ghana, customers of the airline industry generally do not have much bargaining power since they are many and more fragmented and do not have the facilities to supplier the air transport service themselves.
Threat of Substitutes
The airline industry in Ghana faces little threat from substitute products and services especially for the international airlines. For the local airlines which ply mainly between Accra and Kumasi, faces some threat with improvement in the road network. For international airlines, flying to other continents, the major substitutes is sea transport. Such a substitutes does not constitute a real threat because aircraft services, have over the years been used as substitute for services of sea liners as more and more cargo planes are lifting freight across the borders of the country.
The airline industry in Ghana has some rivalry completion among the players due to the fact that they are about the same size. The international airlines such as British Airways, Delta Airlines, KLM, Swiss Air are about equal in size. There is also a huge capital investment requirement in the airline industry; the growth rate is low there for the airline companies in Ghana compete mainly on price. There is also not much differentiation in the services provided by the airlines, and this heightens the competitions in the industry. Inability to store services provide; high operating costs and demand fluctuations also lead the high price-based competitive rivalry in the airline industry in Ghana.
In conclusion is can be said that using Porter’s five forces, the airline industry relatively has low threats of new entrants, high supplier power, medium to low bargaining power of buyers and intense competition with threats of substitutes being medium.
3. Compare and contrast the four types of industry structure and make a succinct judgment on the type of airline industry in Ghana.
Colander (2001) identifies the four types of industrial structure as the Monopoly, Perfect Competition, Monopolistic Competition and Oligopoly.
Characteristics of the four types of industry structure
Colander (2001) explains that monopoly is an industry structure in which one firm makes up the entire market, that it is polar opposite to competition. In this type of industry structure, only one firm exists and produces one product with no substitutes and therefore, faces no competition from other firms. The author explains monopoly has very high barriers to entry which can be legal, social, natural or technological. Thus monopoly establishes price at the most profitable limits and engages in advertising to promote the firms image.
In oligopoly, there are a few competitors or sellers of either homogenous of differentiated products. Thus there are a small number of competitors who dominate the industry. Often, there exist smaller firms in apart from the dominant firms in oligopolistic industries. Such small firms survive by offering product kinds not deemed profitable enough to attract the attention of the dominant firms. Barriers to entry into this type of industry structure are rated medium to high as compared to that of monopoly. Oligopolistic industry may see its incumbent engaging in trade wars to cut decrease the market share of their rivals or seed monopolistic position by cartel, mergers, takeovers or aggressive marketing
Colander (2001) defines monopolistic competition as an industry structure in which there are many firms selling differentiated products over which the firms have a slight control over prices of their products. The author explains that monopolistic industries often have lower barriers to entry than oligopoly.
Perfect competition industry, like monopolistic industry, has many firms. However, it produces homogenous product contrast to that of monopolistic which offers differentiated product. Also while the other three industry structures have at least some barriers to entry as well as control over prices of their products, the competitor does not have any control over prices of its products, neither there are any barriers to entry.
The industrial type of the airline industry in Ghana
From the comparisons and the contrasts made among the four industry types, the airline industry in Ghana is tilted most toward oligopoly. The reasons are that there are a few competitors in the domestic and the international airline industry. As of 2013, the four dominant competitors in the domestic airline industry had 99% of the domestic flight market share (Antrak-39%; Star Bow-35%; Fly540-18%).Source: https://www.modernghana.com/news/466497/antrak-is-most-flown-domestic-airline-in-ghana.html
For the international there are a few dominant competitors having the greatest share to of the market share while there are other smaller ones in that regard.
In addition the airline industry in Ghana, despite the ‘free sky policy’ by the government, has high barriers to entry and the services are differentiated to some extent based on destination. They also engage in aggressive marketing to promote their brand image on various media platforms including television and radio and to constantly keep themselves and their services in the eyes of the customer. On differentiation, the British airline commended itself for introducing booking systems online that is designed to enable its customers manage the booking system themselves, including paying for tickets and choosing their seats and with possible changes.
4. Evaluate the internal factors of Southwest Airlines, the strategic capabilities such as the unique resources, core competences which may lead to competitive advantage.
From the Resource Based View, a company’s internal resources are basis for competitive advantage. That is, the competitive advantage and superior performance of a company is explained by the distinctive capabilities (resources and competences) it possesses. The capabilities, according to Johnson et al (2008) are grouped as threshold capabilities and capabilities for competitive advantage. The threshold capabilities are classified a threshold resources and threshold competences. The capabilities for competitive advantage on the other hand, are classified as unique resources and core competences. Threshold capabilities are those needed by an organisation to meet the necessary requirement for competing in a given market (Johnson et al, 2008). However to gain competitive advantage, an organisation need to have unique resources and core competences. Unique resources are those resources that critically underpin competitive advantage and are difficult for others to obtain or cannot be imitated, for example, brand equity. Core competences are taken to mean the skills and abilities by which resources are deployed in an organization’s activities and processes to achieve competitive advantage in ways competitors are unable to obtain or imitate. These distinctive capabilities have to be sustainable, dynamic and indestructible.
Southwest airline has unique resources and core competences which can lead to competitive advantage. First, Southwest Airlines has developed a very strong brand over the years. Established in 1978, it is regarded as the world’s largest low-cost carrier. Thus, one of the core competences of Southwest airline is its superior skill in achieving low operating cost for its low-cost competitive strategy without compromising quality service for its customers.
Secondly, Southwest airlines has been found an airline that is most heavily unionized in the United States (US) airline and pays salary rates estimated to be at or above average in relation to the airline industry in the US . The low cost advantage emanates from its work rules which are more flexible and make possible cross-utilization of virtually all employees except where licensing or safety standard do not allow. Thus its workforce creates more output per employee than the competition. This is made possible by the unique way it deploys it human resources.
Southwest’ relations with employees is core competence that has persisted over a long period. With innovative management style, the airline maintains continuous focus on high-performance relationships, and its people-centered practices have been a key factor in its unequalled great achievement in the industry.
Southwest can also pride itself of the unique culture it has created in the industry. It has a Culture Committee that has the mission of assisting in creating the Southwest spirit and culture any where, enriching it and making it better.
Another core competence Southwest has is its supreme customer services. Certain strategic capabilities can be imitated or obtain by others such an superior technology provided by third parties. However, with customer, service is very difficult for competitors to obtain or imitate. At Southwest, Airline Editor (2014) reports that there is supreme customer service and that from the bottom to the top of the organisation, every person is highly conscious of customer service. The Chief Executive, Herb Kellecher, is known to help out with handling luggage on Thanksgiving. Technically, each employee at Southwest has their own customer, and that each serves directly or indirectly the passenger. The caterer’s customer is the flight attendant while the mechanic serves the pilot.