Organisational Strategy at Flybe
Organisational Strategy at Flybe
For the purposes of this report I have chosen Flybe as my main focus of discussion in the UK and European airline industry. Flybe is Europe’s largest regional airline with 162 routes, operating from a total of 53 departure points. In this report I will analyse why it has made sense for Flybe to build on their strengths of being a regional operator and how they have managed to find a niche in the crowded airline marketplace. I will also discuss their strategy for future growth and how they have chosen their battleground carefully. I will discuss in detail how Flybe is attempting to fulfil its mission statements of “Low Cost, But not at any cost” and “To give you safe, efficient and friendly service”(Flybe, 2008).
Eye For Travel (2008) reports that Flybe’s financial reports for the year-ending 31 March 2008 show 46% increase in turnover to £535.9m. There was also a profit before tax of £53.4m. Flybe’s competitors such as EasyJet, Ryaniar and BMI Baby have not had such positive figures in these tough economic conditions. I have included in this report the capability analysis of Flybe, the stakeholders analysis and how Flybe can utilise its resources to gain competitive advantage. Relevant appendices and a bibliography are included at the end of the report.
STRATEGIC CAPABILITY ANALYSIS FOR FLYBE
Effectiveness of strategies used 2002-2008
The period 2002-2008 was significant for Flybe. It coincided with a major shift in strategy in response to market conditions. Flybe adopted the LCC business strategy in 2002 (Done, 2003). The author’s aim is to identify the strategies using the Bowman’s Strategy Clock (1995). Evaluation of strategies will be done using the TOWS matrix (see Appendix 1 for Flybe’s strengths and weaknesses).
Low Cost No Frills Strategy
The adoption of the LCC business model by Flybe as a strategy can arguably be described as the positioning approach. This strategy could not have been planned but was rather an emergent one following the downturn in profits exacerbated by September the 11th event. A closer analysis of the Bowman’s Strategy Clock reveals that Flybe’s initial strategy was that of low price. According to Done (2003), Flybe’s restructuring process was geared towards competing with the established no-frills airlines. Competition with Ryanair and Easyjet was therefore inevitable, but was this strategy sustainable? How effective was this strategy?
According to Grant (2005), to compete effectively with a low cost strategy a company should be having economies of scale, experience curve and a lead on the market. Datamonitor (2007), notes that Flybe has had a lot of experience in the aviation business. It enjoyed economies of scale in its operations. It had a lot of experience in the airline industry. What it did not have was the large market share when it decided to adopt the LCC model of operation. Upon further analysis one can safely argue that this was a major risk that Flybe took by entering into this short haul business. A TOWS matrix analysis of Flybe (Appendix 1) suggests that Flybe adopted an effective strategy because it had strengths like economies of scale, dedicated staff, capital and resources to explore the expanding low cost business. Flybe only needed to offer a competitive product similar to its competitors. As a potential entrant into the business, there was no deterrence from the established airlines to stop Flybe from entering the market. On that basis, Flybe can be said to have used an effective strategy. It is also important to look at the strategies that sustained Flybe once it entered the market.
Flybe’s Business Strategies
Restructuring of Flybe was associated with the rapid expansion programme. Flybe chairman, Jim French, announced the completion of its five year plan of rapid expansion programme (Annual report of 2007). There was an increase in the number of aircraft, network and profits for the corporation for the period 2002-2007. Rapid expansion was mainly achieved by the acquisition of BA Connect, a subsidiary of British Airways. The acquisition made Flybe one of the largest European LCC (Done, 2007, Annual Report, 2007). This fitted well with his strategy of competition with its established airlines. However, acquisitions carry their own risks such as human relations problems (that can arise after the acquisition), not easy to dispose of unwanted parts of the company, problems of clash of national cultures particularly where target if foreign and high risks if a wrong company is targeted (Lynch, 2003).
Flybe has been reframed into a recognisable product on the market. The Flybe brand has continued to grow with passenger volumes up from 4.7million to 7million in 2006 and 2007 respectively (Done, 2007). The forecast for year 2008 was predicted to an annual turnover in excess of £500 million and passenger volumes of 10 million (Done, 2007).
It is debatable that Flybe’s initial plan was to establish itself on the market as phase one of the programme. Against a background of heavy losses, Jim French took a risk that paid off by sustaining Flybe into existence considering the intensity of competition on the market against established brands like Ryanair and Easyjet. Sustaining Flybe on the market would have been the second phase. Flybe adopted a strictly no-frills strategy between 2002 and 2006. However, a shift in strategy has been noted from 2006 onwards. This strategy is that of differentiation.
The Differentiation Strategy
Examining Bowman’s Strategic Clock (Appendix 2), Flybe has now shifted its strategy to differentiation without a price premium. Its major competitors have continued with the no-frills approach, while Flybe has commenced on product differentiation. Datamonitor (2007) noted that product differentiation for Flybe is in frequent flier programmes, on board deli, business express travel and corporate users. As highlighted in the 2007 Annual Report Flybe became the first LCC to charge baggage handling. However, its competitors have copied this and are doing the same. The advantages of differentiation as highlighted in research and literature include creating value for the customer, gaining a market share and enticing customer loyalty to the offered product (Grant, 2005). Judging by Flybe’s results in terms of profitability and growth in passenger figures it appears as if differentiation strategy is working. On the other hand, it should be noted that Debonair came unstuck when it employed this strategy.
Parnell (2006) has reiterated Porters argument that a company needs to have either a Low Cost Strategy or Differentiation Strategy combined with a focus strategy. If this does not happen then businesses risk their potential to maximise on performance. Flybe at present appears to be pursuing both strategies of Low Cost and Differentiation. Other authorities have argued for the co-joined approach suggesting the importance of customer perception in terms of price and value (Bowman and Faulkner, 1997).
The author argues that Flybe might be leading ahead of its competitors. When Michael Oleary, Chief Executive Officer of Ryanair, was asked about what his next challenge was he suggested differentiation strategy (Done, 2007). Whilst Flybe has got competitive advantage at present in respect of differentiation, other competitors have already started thinking about it because it is easy to copy. Jim French can be said to have used an effective strategy again.
As shown in Appendix 1(TOWS matrix for Flybe in 2008), Flybe has used its strengths of fleet efficiency and competitive routes to take advantage of the growing and expanding LCC market. It has also used product differentiation and customer loyalty to exploit a large share on the growing market. By purchasing environmentally friendly aircraft, Flybe has managed to counter threat of global warming concerns. Product differentiation has been used to insulate Flybe from the competitive environment where Ryanair and Easyjet have a large stake.
STAKEHOLDER ANALYSIS FOR FLYBE
Stakeholder pressures played a significant role in terms of strategies that have been chosen by Flybe. The main stakeholders include shareholders, employees, customers, governments, suppliers, environmental pressure groups, unions, foreign governments, media, airports, local governments, directors, financial institutions and competitors. . The stakeholder pressure shall be examined using a power-interest matrix (Appendix 3).
As power and interest moves towards high power and high interest segment, it is indicative of an increased level of stakeholder pressure. Appendix 3 represents three periods when Flybe decided to change its business model in 2002, a period of stability between 2002 and 2006 and finally when it started showing interest in the acquisition of BA Connect in 2006. Meeting the expectations and demands of all stakeholders has been described as almost impossible within literature (George, 2003).
Pre-2002 period Flybe’s management was under considerable pressure from its main economic stakeholders. The company had gone for nearly three years without making any profits and with limited growth (Done, 2003). Pressure was mounting mainly from its shareholders for results in terms of profits. Tudway and Pascal (2006) pointed out that a shareholder’s perspective regarding responsibilities of directors as that of increasing shareholder value. Appendix 3 shows that there was a lot of pressure from financial institutions, creditors and share holding employees in the high interest- high power segment. Media had also started showing interest in what was happening at Flybe. Flybe’s competitors and suppliers were eager to find out what was happening in Flybe hence indicated in the low power- high interest segment.
The resultant effect in terms of strategy was a change in management. Jim French was appointed the managing director and there was a change in the direction of the company. A positioning approach was adopted. Flybe announced its decision to establish itself as a LCC. The company was re-branded into Flybe. In that respect, stakeholder pressure was significant in influencing Flybe’s strategies.
Between 2004 and 2006 there was a different kind of pressure as shown in appendix 3-1. There was a low interest from suppliers, media and the government with low power as well. There was high interest but with low power from competitors, unions, employees, pressure groups, creditors and financial institutions. Meanwhile Flybe had embarked on its strategy of rapid expansion. Heavy losses at BA Connect precipitated the move by Flybe for a possible acquisition in 2006. The ultimate strategy was therefore fulfilled but the power-interest matrix also started showing a different picture before the acquisition (appendix 3-2).
The government as a regulatory body had to come in with high interest and high power. Easyjet’s interest in BA Connect was blocked by the government paving the way for Flybe as the main competitor for the acquisition (Done, 2006). Media and environmental pressure groups also started getting involved towards the high interest and high power segment. Interests from secondary airports started to increase since they were going to profit from the acquisition. The resultant effect was the acquisition of BA Connect in 2007. Environmental pressure groups could be described as having played a significant role in Flybe’s decision to acquire smaller and environmentally friendly aircraft, the 78 seater Q400 turboprop aircraft. Flybe abandoned its initial interest in either Boeing or Airbus aircraft. Stakeholder pressure could be argued as having played a part, and still plays a significant part today.
Stakeholder pressure is therefore a significant factor in firm strategies. However, not everybody’s demands will be effected by management. Some decisions will be taken at the expense of others. A power-interest matrix is a useful tool in stakeholder pressure assessment.
RECENT STRATEGIC CHANGES THAT FLYBE HAS TAKEN
Fit or Stretch future strategies
Flybe achieved in its strategies of rapid expansion and re-branding the corporation within a short period of time. Change of business model, acquisition of BA Connect and differentiation strategies have all been aimed at gaining a substantial market share through positioning. The author argues that with its accelerated rate of growth Flybe now requires to consolidate its position on the market by focussing on its internal resources. Working on its core competencies, Flybe can still realise growth. The author therefore suggests that Flybe’s future strategies should be stretch based. Indeed, in the battle of the low cost carriers, Flybe have decided that an ambitious strategy is the best way that they can prosper. The acquisition of BA Connect accelerates this strategy. Flybe’s rapid growth will enable them to spread their costs over a far greater range of activity and routes than ever before. This should enable them to continue to be able to offer low cost fares (Bizled, 2008).
Evidence in literature and research asserts that the development of competitive advantage could be through looking at a firm’s resources and capabilities (Foss and Kaudsen, 2003; Barney, 2001). Appendix 4 is a value chain system for Flybe. A close examination of the value chain has led the author to conclude that Flybe has huge resources at its disposal and capabilities that it can develop into core competencies. As such, its future strategy should be based on the inside-out approach.
Looking at the inbound activities, Flybe made the right decision in terms of aircraft acquisition. Flybe’s 78 seat Bombardier Q400 Turboprop and the Embraer 195 (which will be fully operational in 2009) have been heralded as an environmentally friendly fleet, its capacity suits the market. Flybe’s competitors have gone for bigger aircraft instead, despite the threat of public protests and impending legislation (Done, 2007). Flybe could possibly have a competitive advantage from its assets. Effective operations supported by its links with Exeter University in terms of learning and development could improve and cut down on costs. For the period 2007-2008 financial year about £10-15m has been set aside for marketing the Flybe product.
In 2007 Flybe had cash reserves in excess of £136.2m compared to the same period the previous year (Annual Report, 2007). This is strength and Flybe should focus on building route growth, developing its brand and increasing its fleet efficiency. Claiming a core-competency in Flybe business should concentrate on improving passenger load factor, reputation index and operational efficiency (Pegels and Yang, 2000). This is achievable considering Flybe’s resources. More importantly, Flybe is currently taking an exceptional change of nearly £6.5m by writing down the asset value of its BAE 146 aircraft (Bized, 2008). This is an essential part of their strategy to operate more efficiently, and in a more environmentally friendly fashion. Flybe’s new fleet will be one of the youngest in the world (Bized, 2008).
The acquisition of BA Connect saw Flybe’s staff increase to over 3000 in a relatively short period (Done, 2007). This author argues that with such a vital resource the process of integration should focus on building a vision and culture that promotes the corporate brand of Flybe (Hatch and Schult, 2003). Nonetheless, post-merger integration will be critical to the success of Flybe. Learning and development for increased productivity and enhanced corporate image should focus on employees. Flybe has recently unveiled details about its project to build a 160-bedroom hotel at Exeter International Airport (This is Exeter, 2008). The hotel would be operated by a third party, with Flybe guaranteeing to fill 80 rooms a night with all its employees and those from other industry sectors attending training courses. This would be part of resource management.
In January 2008, Flybe also announced a landmark franchise Agreement signed with Loganair (The Scottish regional airline). This is Flybe’s innovative philosophy and strategy of continuing to build a market-leading position as Europe’s largest regional airline following the acquisition of BA Connect in 2006. The flights commenced operations in October 2008 (Reuters, 2008).
Flybe should now focus on organic growth. Research evidence has associated organic growth with stretch strategies (Leavy, 2003). However, a two-pronged approach has been suggested as a potentially effective strategy. The need to concentrate on resources while positioning a firm is considered as a dynamic and vibrant approach in the unpredictable market of today (Leavy, 2003). Flybe would be no exception to adopt such a strategy for the future. Flybe’s response to development on the market will determine the strategy to focus on. Jim French has not ruled out taking a predatory stance to opportunities that arise on the market. The author recommends a strategy based on stretch while keeping an eye on the industry structure.
Other Future Strategy Options
Flybe could consider the possibilities of mergers, alliances and sustained acquisitions of other businesses. Acquisition is where strategies are developed by taking over ownership of another organisation (Johnson, et al 2006). Flybe recently penned a three year exclusive contract with car rental firm Avis that will see both companies explore the possibility of integrating car hire with flight bookings (Skyscanner, 2008). However, Flybe would also have to consider the pros and cons of mergers and acquisitions. Another strategy option that Flybe could possibly consider would be stock market floatation, when the current market conditions and the economic situation become favourable.
As seen above, external factors either create threats or opportunities for firms in the industry. Industry structure analysis is vital to identify key drivers in the industry. Flybe has successfully chosen its strategies to date. It remains to be seen if future strategies will be as effective but the author has suggested a stretch based strategy while keeping an eye on the market.
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