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In order to profitably satisfy customers needs, the firm first must understand its external and internal situation, including the customer, the market environment and the firm’s own capabilities. Furthermore, it needs to forecast trends in the dynamic environment in which it operates.
Customer analysis: As a full service airline BA’s customers are first, business and economy. Their demand is different. As markets become more competitive and spending power increases, the balance of power is shifting from supply to demand, giving consumers the upper hand. Business and luxury travellers who are willing to pay high price for ‘in-flight’ better quality service. Business class consider a specific city and schedule and frequent flight departure and modern communication and entertainment facilities. They are the key source of revenue. There is an increasing demand of quick check in, safe flight, networking, and technology. Customers become environmental conscious. So the services for each segment should be different according to their needs, CRM and R&D is essential in this regard.
In 2010 the average load factor for BA was 78.5% that is higher than industry average.
Company: In an industry which is on the verge of its decline stage where no growth is visible. It is very difficult for any airline to survive without stronghold and sustainable competitive advantage which can give them economies of scale that they can leverage .British Airways has got some major competitive advantages over the entire airline industry: Brand Image, Partnerships & Alliances, Financial size and stability, Terminal 5. BA’s strategy is highly customer focus and continuous service development.
With these competitive advantages they differentiated their services and different pricing strategy for each segment-first class, business, and economy. As a premium airline BA’s customer segmented and BA’s marketing mix is slightly different for each segments.
Competitors: The markets in which BA operate are hyper competitive. They face direct competition from other airlines on their routes, as well as from indirect flights, charter services and from other modes of transport. Some competitors have cost structures that are lower than BA or have other competitive advantages such as being supported by government intervention.
BA’s direct competitors are those who operate similar services and lie within the same strategic group. The competition is likely to be most intense within this group as they are seeking similar strategies. Lufthansa’s five major competitive advantages are Strong financial performance of individual segments, Favourable cost structure, Innovative services, Regarded as the most punctual airline and their Strategic Alliances, A powerful balanced network. Similarly, KLM got two coordinated hubs at developing airports, Sky Team alliance Air, Financial strengths.
BA faces competition from a small number of serious contenders in the UK with the main contenders being Virgin Atlantic, and United Airlines in the Star Alliance.
Although they do not lie within the same strategic group as BA the advent of low-cost air travel has changed the face of the airline industry. Airlines such as Ryan air and Easy Jet have established themselves among the leading carriers in Europe, whilst the more established long-haul carriers such as BA have struggled to keep up with their counterparts’ growth rates.
New planes, new routes, additional flights and management changes are all factors that impinge a business. Such changes made by a competitor need constant monitoring in order for BA to examine its current position and develop future strategies.
Political: Regulation of the airline industry is increasing and covers many of BA’s activities, including route flying rights, airport slot access, security and environmental controls. The ability to both comply with and influence any changes in these regulations is key factor to maintain BA’s operational and financial performance. Restriction on mergers will have an impact on BA’s proposed alliance with American Airlines.
Environmental: Government plans to significantly increase environmental taxes with the introduction of a per flight tax, the European Union Emissions Trading Scheme and the potential for other environmental taxes may have an adverse impact upon demand for air travel and/or reduce the profit margin per ticket. These taxes may also benefit BA’s competitors by reducing the relative cost of doing business from their hubs.
Economical: Deterioration in global economy will have an impact in BA’s financial position. Higher inflation rate in UK will reduce holiday travels. Businesses are no longer willing to pay premium price for their staff to make short trips less than three hours.
Social: The UK has an aging population. Potential opportunities for growth as older generations have more time to spend on leisure activities such as international travel.
Growing unemployment rate and government cuts will increase bargain power as an employer.
Understanding culture is an important issue for every business. British people are highly individualistic, uncertainty avoidance and some practice of masculinity. So a diverse workforce is necessary for BA. In global marketplace is better able to understand the demographics of the marketplace it serves and is thus better equipped to thrive in that marketplace than a company that has a more limited range of employee demographics.
Technological: Technology is vital for competitive advantage, and is a major driver of globalization. A key issue will be the extent to which technological advancements can offset upward pressures on prices and costs. BA is focused on improving its customer service in line with modern technology and has opened its first drive-through, offer Wireless LAN systems and communicate through modern SMS. A significant long-term threat is the effect of video-conferencing on the demand for air transport and they may have to accept.
Legal: A significant legal factor affecting BA is the power of trade Unions. BA has suffered many strike actions in recent years and is aware of the implications that the trade unions can cause.
Porter’s Five Forces:
The five forces are environmental forces that impact on a company’s ability to compete in a given market. The purpose of five – forces analysis is to diagnose the principal competitive pressures in a market and assess how strong and important each one is
Competitive rivalry: cost competition is very high
BA caters for both long hauls, medium and short haul flights. Within long haul there is a little differentiation between BA and their competitors, in terms of value proposition.
The short haul market is more fragmented with many small players( Ryan air, Easy jet )
In Medium haul Competitive rivalry is fierce; Virgin is strongly opposing BA and AA proposed merger.
Consolidation of competitors has increased competition.
Power of suppliers:
Two aircraft manufactures-Boeing, Airbus. there is no sign they start flight service
BA restricted by sole supplier of fuel to the airport.
BA is highly unionised and the employees use collective bargaining through trade unions in order to increase their bargaining power.
Power of Buyers: as market is shrinking customers power may increase
Low concentration of buyers to suppliers means they have little bargain power.
Increased internet usage has amplified awareness and interaction of customers.
Threat of new Entrants:
Significant barrier to entry such as competitive environment, high regulatory requirements and high capital cost requirements.
Barriers to exit are in place which deters new entrants.
If funding is cheap there is a probability of new entrants
Threat of substitutes:
There are few direct substitutes:
1.short haul flights: train operators the Euro star or ferry
2. Long haul flights: no notable substitutes.
Based on the PESTEL Analysis and the Porter’s five forces analysis it is evident that airline industry is hyper competitive. Buyers may be powerful in this stage zero sum game appears. Market share is crucial providing leverage against suppliers in terms of cost. Mergers and acquisition is typical. Though British Airways is a dominant player in this industry they should create significant switching cost through their core competencies and VP to remain competitive. Compromise with cabin crew is necessary to stop service disruption.
BA should have strategic fit to compete with different strategic groups. As airline industry is facing stiff competition BA can attract customer through differentiated service and employee productivity and morale.
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