QUESTION:The industry analysis is necessary in the strategic marketing planning in order to identify the opportunities and threats in the competitive environment. Choose the airlines as an industry to apply the Michael Porter’s ‘five forces’ model and discuss how one established airline like SIA should respond to the competitive environment, after analyzing the industry.
SIA is internationally recognised as one of the world’s leading carriers. The company had recognised that in this highly competitive market, any advantage gained by one airline over others will be short-lived, and ideas that are new will become commonplace in a matter of months.
As such, SIA noted the importance of having to always stay at the forefront both in service and technology.
This strategy of SIA focuses primarily not on reducing costs, but on enhancing quality or service and preventing any customer problem from arising. SIA has succeeded most uniquely with this type of strategy in the airline industry, a strategy commonly employed in service businesses that command premium prices with high margins, businesses in which there are a high degree of repeat business, with word-of-mouth praise by customers as one of the most important marketing channel.
Internally, three cost items account for half of SIA’s operating cost: fuel, aircraft depreciation and wages. There is little that can be done with respect to fuel cost except for judicious hedging. As for aircraft cost, SIA is universally acknowledged as being second to none in securing the best prices and purchase terms from aircraft and engine manufacturers. That leaves wages. The airline’s fixed wages amount to less than $800 million a year, roughly one tenth of total operating expenditure, a modest proportion indeed.
Variable wages comprise the rest, consisting mainly of profit-based bonuses and crew allowances based on actual hours of flying by pilots and cabin attendants. The recent wage cuts were a result not of lavish recruitment or over-indulgent pay rises in the past, but of the cumulative damage wrought by terrorism, war and SARS, and the need to stay competitive as other carriers undergo major restructuring of their cost structures.
Externally, the industry analysis has a direct effect on a company’s strategic competitiveness and above-average returns. While companies, in this case, our very own SIA, cannot directly control the elements of the general environment, it can influence and will be influenced by factors in the airline industry and competitor environments. The intensity of competition in the airline industry and its profit potential are a function of Michael Porter’s ‘five forces’ model of competition: the treats posed by new entrants, the power of suppliers, the power of buyers, product substitutes, and the intensity of rivalry among competitors. Studying these forces allows SIA to find a position in the airline industry where it can buffer itself from the power of the forces in order to increase its ability to earn above-average returns.
Threats posed by new entrantsNew entrants to an industry typically bring to it new capacity, a desire to gain market share, and substantial resources (Wheelen and Hunger, 7th Ed, pg 61). New entrants to an industry can raise the level of intensity of the competitiveness among companies, thereby reducing its attractiveness. The threat of new entrants largely depends on the barriers to entry – obstructions that make it difficult for a company to enter an industry (Wheelen and Hunger, 7th Ed, pg 62).
High entry barriers exist in some industries (e.g. shipbuilding) whereas other industries are very easy to enter (e.g. estate agency, restaurants). Key barriers to entry include the need to gain economies of scale quickly, the need to gain technology, large capital and investment requirements, high customer switching costs, lack of access to industry distribution channels, the likelihood of retaliation from existing industry players, and potential saturation of the market.
Despite all the numerous barriers to entry, new companies sometimes enter industries with higher quality products, lower prices and substantial marketing resources. It is the management strategist’s job to identify such threats from potential new competitors and to monitor the new rivals’ strategies, so as to counterattack as needed, and to capitalise on existing strengths and opportunities.
Budget airlines such as Air Asia have been emerging in recent times which represent the emerging point-to-point budget model symbolized by Southwest, JetBlue, EasyGroup and RyanAir. With the economy still on its way to recovery, travellers are still reluctant to spend. The low carrier model works best in short-haul point-to-point market where price is extremely important and the deciding factor is price.
The advantage of the low-cost model is that it fits well with current consumer demand as budget flights are cheap and offer more attractive deals to such travellers.
One important factor for the emerging budget airline is that travellers’ main concern is to reach a destination. There is always a group of travellers with just this simple need to be satisfied. Those travellers have no need for in-flight or ground-level services. In face of growing competition, SIA would be launching their very own budget carrier called Tiger Airways. I believe that this is a good strategic move by SIA to tackle the threat from the new budget airlines that are entering the industry currently.
Power of suppliersSuppliers are the businesses that supply materials & other products into the industry (Wheelen and Hunger, 7th Ed, pg 64). Suppliers can affect an industry through their ability to raise prices or reduce quantity of supply. The cost of items bought from suppliers (e.g. raw materials, components) can have a significant impact on a company’s profitability. The bargaining power of suppliers affects the intensity of competition in an industry especially when there are a large numbers of suppliers, when there are only a few good substitute raw materials, or when the cost of switching raw materials is costly. If suppliers have high bargaining power over a company, then in theory the company’s industry is less attractive.
Companies should pursue backward vertical integration to gain control or ownership of suppliers. This strategy is effective when suppliers are unreliable, too costly, or not capable of meeting a company’s needs on consistent basis. Companies can negotiate more favourably with suppliers when backward vertical integration is a commonly used strategy among rival companies in an industry.
Boeing and Airbus dominate the whole airline industry because they are the two major suppliers of aircrafts. There are no satisfactory substitute products available to airline companies as aircrafts are the only form of commercial air transport. Airlines are not a significant customer group for the two suppliers because they can supply aircrafts to governments/military as well. Boeing’s and Airbus’s aircrafts are critical to the airline company’s marketplace success because aircrafts are the most important resource in the airline industry. This in turn leads to high bargaining power of Boeing and Airbus – they can increase prices and reduce the quality of their aircrafts, without any retaliation by any airlines including SIA.
However, another major supplier of SIA is Singapore Airport Terminal Services (SATS), which provides ground-handling and in-flight catering services at Changi Airport. It is a subsidiary of Singapore Airlines (SIA) and now has about 80 per cent market share. It is a fine example of vertical integration undertaken by SIA to gain ownership of supplies. SIA was also very successful with other airline-related companies such as SIA Engineering Company which are now large groups of companies based all over Asia, with profits around the $200 million level, a significant proportion contributed by associate companies.
Power of buyersBuyers are the people or organisations that create demand in an industry (Wheelen and Hunger, 7th Ed, pg 64). When the buyers are concentrated or large, or buy in big volume, their bargaining power represents a force affecting the intensity of competition in an industry. Buyers affect an industry through their ability to force down prices, bargain for higher quality or more services, and play competitors against each other. The bargaining power of buyers is higher when the products being purchased are standard or undifferentiated. Whenever the bargaining power of buyer is substantial, rival companies may offer extended warranties or special services to gain customers loyalty.
Air travellers and transportation companies purchase a large portion of the airline industry’s total service. The sale of tickets to air travellers and cargo space to transportation companies account for a significant portion of the airline company’s annual revenues. Buyer groups experience low switching costs as they can choose one airline company over another, depending on which offers better deals. When there are low switching costs, competitors can attract travellers through pricing and service offerings.
As such, buyer groups have high buying bargaining power – companies in the airline industry have to be more focused on the needs and desires of their customers in order to better serve and satisfy them. SIA’s KrisFlyer gives its members more rewards and privilege that come with travelling so as to gain customer loyalty and to entice repeated sales. This is just one, but excellent, way of better serving and satisfying travellers who have considerable power.
Product substitutesSubstitutes are products that appear to be different but can satisfy the same need as another product (Wheelen and Hunger, 7th Ed, pg 63). In many industries, companies are in close competition with producers of substitute products in other industries. For example, tea can be considered as a substitute for coffee. According to Porter, “substitutes limit the potential returns of an industry by placing a ceiling on the prices companies in the industry can profitably charge” (Wheelen and Hunger, 7th Ed, pg 64). In other words, it means that the presence of substitutes put a ceiling on the price to be charged before the consumers will switch to the substitute product. The presence of substitute products lowers the industry attractiveness and profitability because of the limited price levels.
The competitive strength of substitutes is best measured by the market share those products obtain and those companies’ plans for increased capacity and market penetrationSubstitutes to aircrafts include sea and land transports which are much cheaper alternatives. However, they pose no serious threats to the airline company because air transport is still considered as the faster and most effective way to reach a destination. Nevertheless, with rapid advancements in technology, new and better modes of transport may gradually emerge as better alternatives to aircrafts. In view of this, airlines such as SIA should keep developing strategies to differentiate itself along dimensions that travellers and transportation companies value, so as to reduce any substitute’s attractiveness.
The intensity of rivalry among competitorsThere are many airline companies in the industry. As a result, intense rivalries are common. The companies are generally aware of competitors’ actions, often choosing to respond to them. Due to the 911 incident and SARS, the airline industry has been experiencing slow growth which makes rivalry even more intense as companies battle to increase their market shares by attracting competitors’ customersSome airline companies are viewed as having few differentiated features or capabilities. Rivalry intensifies when a number of airline companies offer the same level of service. In view of this, travellers will then make the decision based on price.
What SIA can do to counter the intense rivalry is to take competitive actions and competitive responses in efforts to be successful. The most important thing is of course to differentiate itself from competitors’ offerings in ways that travellers and transportation companies value and in which SIA has a competitive advantage.
ConclusionAs can be seen from the above industry analysis, with threats posed by budget airlines; high bargaining power of Boeing and Airbus; high bargaining power of air travellers and transportation companies; and lastly, intense rivalry among competitors in the airline industry; SIA has to continuously improve itself in order to stay competitive in the airline industry. In fact, the company is doing that very well. It has been fast in reacting to the changes in the industry environment, as evident from their current strategies of introducing a budget airline, cutting costs, focusing attention on business class travellers and implementing long haul flights. Following such moves, will SIA then be able to continue staying ahead of competitors and be ensured of its position as one of the world’s leading carriers for many years to come? The answer remains to be seen.
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