Strategic Management in Services Organizations

Bouhad Ilyas MBA Hospitality management November 2012

Table of Contents
Executive summary ................................................................................................................... 3 Introduction ................................................................................................................................. 4 Corporate structure: Corporation, firms & organization ............................................. 5 The corporation ....................................................................................................................................... 5 The firm and the business system ................................................................................................... 5 The organization ...................................................................................................................................... 7 Strategic scope of the firm ...................................................................................................... 8 The product scope ................................................................................................................................... 8 The market scope .................................................................................................................................... 8 The geographical scope ........................................................................................................................ 9 Competence scope ................................................................................................................................ 10 Business system and strategic costs .................................................................................. 10 The sunk costs ........................................................................................................................................ 10 Learning curves ...................................................................................................................................... 10 Economies of scale ................................................................................................................................ 11 Economies of scope .............................................................................................................................. 11 Complexity costs .................................................................................................................................... 11 Transaction costs .................................................................................................................................. 12 Industry analysis: Porter ....................................................................................................... 12 Bargaining power to those: ............................................................................................................... 13
Potential entrants ............................................................................................................................................ 13 Buyers ................................................................................................................................................................... 13 Substitutes ........................................................................................................................................................... 13 Suppliers .............................................................................................................................................................. 13 Industry competitors ...................................................................................................................................... 13

Market dynamic ........................................................................................................................ 15 Market definition ..................................................................................................................... 15 Risk of Myopia ........................................................................................................................................ 15 Risk of presbytia .................................................................................................................................... 16 Market phases ......................................................................................................................................... 16 Market differenciation or segmentation ..................................................................................... 16 Market strategies ..................................................................................................................... 17 Organization .............................................................................................................................. 18 Structure ................................................................................................................................................... 18 Culture ........................................................................................................................................................ 18 Profile of individuals ............................................................................................................................ 19 Leadership models ................................................................................................................................ 19 Value creation ........................................................................................................................... 20

Executive summary
The aim of this strategic case study of British Airways is to apply all the seen chapters during the lessons of strategic management in services organizations. This document contains some information from both the annual report of British Airways and its websites. The CEO is Mr. Keith Williams, and has been a main Board director for the last six years. He is also a Board member of International Airlines Group, the parent company of British Airways. Prior to joining British Airways he worked for a range of major corporations including Reckitt and Coleman, Apple Computer Inc and Boots. He has extensive financial experience including a detailed knowledge of business planning, capital projects, project finance, and has been involved in many recent issues such as pensions and industrial relations. To well develop British Airways and compete its competitors, here are some recommendations in order to compete the other airlines. Cancel unprofitable flights or join these flights with other airlines and not to use large Boings during short-distance flights Improve their marketing programs to attract a lot of new passengers. Reduce salaries and bonuses of its top-managers

The airline industry is one that continuously faces change due to new technology, customers needs, and other types of change. British Airways needs to continue to revaluate their current strategy by looking at the re-energizing stage.

Introduction

The strategy of British Airways is to grow their presence in key global cities by signing a lot of partnerships with other airlines, and delivering an outstanding service for customers at every touch point, in flight and on the ground. British Airways in brief: Creation of British Airways: By the 1970s, the United Kingdom's air service primarily consisted of two government-owned airlines. British Overseas Airways Corp. operated long-haul international routes and British European Airways absorbed independent U.K. airlines that flew short-haul European routes in the 1950s. The both airlines came under the new governmental organization, the British Airways Board in 1972, two years later, they merged all their operations and rebranded under British Airways. "The World's Favorite Airline": After the merger, the airline introduced the supersonic jet Concorde in 1976, winning prestige and trans-Atlantic business customers. The airline trimmed its route structure and adopted the slogan, "The World's Favorite Airline." Privatization and Acquisitions: In 1987, the British government floated British Airlines on the London Stock Exchange. The airline moved to acquire competitors such as British Caledonian in 1987 and Dan-Air in 1992.

Corporate structure: Corporation, firms & organization

The corporation

International Airlines Group is one of the world's largest airline groups with 398 aircraft flying to 200 destinations and carrying more than 50 million passengers each year. It is the third largest group in Europe and the sixth largest in the world, based on revenue. Formed in January 2011, IAG is the parent company of British Airways, Iberia and BMI. It is a Spanish registered company with shares traded on the London Stock Exchange and Spanish Stock Exchanges. The corporate head office for IAG is in London. IAG combines the leading airlines in the United Kingdom and Spain, enabling them to enhance their presence in the aviation market while retaining their individual brands and current operations. The airlines' customers benefit from a larger combined network for both passengers and cargo and a greater ability to invest in new products and services through improved financial robustness. The airline industry is moving gradually towards consolidation though some regulatory restrictions still prevail. IAG's mission is to play its full role in future industry consolidation both on a regional and global scale.

The firm and the business system

The activities of British Airways are centered in four areas, they invest in better quality in general, better schedules and better onboard service.  Workplace ensuring that they provide sustainable employment for current employees and become the employer of choice for future employees. Marketplace working with suppliers and customers to build a more sustainable business. Environment making sure they minimize their impact on the environment, including their contribution to climate change, air quality, noise and waste.

The organization

In 2010, Iberia and British Airways was merged to create International Airlines Group. British Airways has four subsidiaries, Open Skies, which purchased for $108 million the French airline Lavion. Currently, it is based in France and operates a route between Paris and the airports of New York. The second subsidiary is City Flyer, which is a subsidiary airline that operates a network of European flights from London City airport, and then British Airways World Cargo, the worlds twelfth-largest cargo airline, and finally, the franchise Sun Air of Scandinavia, based in Denmark, a regional scheduled airline operating a franchise service in British Airways colors.

Strategic scope of the firm

The product scope
British Airways has a large product scope, because it proposes many services and products, like offering a range of destinations over the world, booking flights, catering equipment, aircraft control system, hospitality, giving information. Moreover it has a large organization; the money comes from a large economical scope. For example, you can book hotels or rent car for whole holidays online on their website. To talk about the main product The passenger transport, a flight from London to New-York for the next holidays in the economy class costs approximately 1050. But in the first class, the price increases quickly to reach 12000. The difference of price is explaining by the various services proposed on board, and the facility obtained in the airport before the access to airplane, such as online check-in, flat beds and arrival lounges with showers, fast track security when travelling from a Londoner airport (Heathrow and Gatwick) or from New York John F. Kennedy.

British Airways has three transportation industry segments: Air Services Passenger Airlines Airports Cargo Airlines Air Services Suppliers Travel and Hospitality Distribution Hotels and Gaming Cruise Vehicle Rental Freight, Logistics and Rail Public Transport Freight Rail Ocean Trucking

The market scope

British Airways targets people seeking comfort. Its goal is to deliver superior service to its clients willing paying bit more. For its large market scope, British Airways has multiple segments; it means that it sells the same service A flight on the same airplane for all passengers at different prices.

The four classes proposed on board by British Airways are, the economy class, which includes online check-in, a baggage allowance, allocated seats, snacks or meals. The premium economy class for the long-haul flights, this class is available for long-haul flights. It offers more privacy, space and comfort in a smaller, secluded cabin. The business class, with many services on board, likes extra space to work or relax, and fully flat beds on all long-haul flights. The final class is the first class, which includes a high quality of services. The client is assisted during all journeys steps, before take off of the plane, on board, and after landing. For example, on the ground, the customers can have an exclusive check-in and access to the lounge in the airports of London or New York. These three last classes are designed for corporates, and the economy class is for leisure.

The geographical scope

The British Airways main base is at Londons Heathrow airport in Terminal 5, which holds almost all the operating staff, equipment, and aircrafts. But it also has a major presence at Gatwick airport and at one time operated a significant hub at Manchester airport. British Airways would like to grow its presence in key global cities worldwide to provide the best global connectivity for their customers. Thats why it operates in several destinations thanks to its partners. For example, before the merge with the Spanish carrier Iberia, neither British Airways did operate in South America, nor Iberia did operate the North American ground. In 1999, British Airways moved to make itself competitive by introducing the "One World" alliance, which contains eleven airlines. Currently, the network extends to some 570 destinations in 135 countries, and they share marketing costs and airport facilities. Where British Airways flies?

Competence scope

The main competencies that differ from the competitors are: Service on broad: British Airways has always had an above average reputation for its in-flight service. Image of brand: The airline is the largest airline in the UK based on fleet size, international flights, international destinations, and its sole access to Heathrow terminal 5. Large international field: Access to more than 300 destinations. British Airways did its major operations by outsourcing. Like in distribution where there is an agreement between Amadeus, the famous reservation system, which guarantees full content access users worldwide. Moreover, British Airways is in contract with WNS, a global business process outsourcing company, which is based in India. They deliver a range of airline operations, including customer relations, fares and Passenger Name Record PNR servicing requests, passenger and cargo revenue accounting, finance and accounting, research and analytics, revenue and yield management and Human Resources shared services.

Business system and strategic costs

The sunk costs
In the British Airways case, the advertisement, the purchase of aircrafts, even a crash of an aircraft is a sunk cost, because its an irrecoverable investment. The investments made already in the current planes and airport facilities that can't be recovered, instead the airline needs to keep flying and transporting passengers and goods until they pay for the sunk cost and turn a profit. British Airways plans to invest more than 5 billion in products and services by 2015 is underway and supports the launch in September of the first major brand campaign for ten years.

Learning curves
British Airways has done many operations in the past merges, purchase of stakes from other airlines, investments, alliances . Which help it to improve its performance to decrease both time and cost of deliverys process of the final product or service. Thanks to the several experiences with other airlines such as purchase of stakes, creation of One World in 1998, merger in 2010 with Iberia, alliance with American Airlines; British Airways has got a significant learning curve from these facts to compete the other airlines to operate a large destinations to serve and satisfy their customers, and earn a large market share.

Economies of scale
Economies of scale occur when a firm grows larger its long run average costs fall. Within the air transport industry in particular, the biggest is the the transport of passengers and there are significant economies of scale, the merger of British Airways and Iberia shows economies of scale very nicely. Thanks to this merger, both airlines will retain their brands and heritage while achieving significant synergies as a combined force and they can effectively halve their costs, by reducing costs through staff, or by removing some unprofitable destinations. To achieve enhanced scale to compete with other major airlines. British Airways needs bigger network to complete with larger rivals Virgin, Emirates, Air France-KLM and Deutsche Lufthansa. The new company will combine British Airways strong position in Europe-to-North America traffic with Iberias Latin American business.

Economies of scope
The critical activity in British Airways for which there is a market scope strategy, is how British Airways reacted when their customers have would gain access to new destinations, of which half of them are in Latin America. While Iberias customers would gain to new destinations across the British Airways network. Additionally, the deal benefits from planned alliance with American Airlines.

Complexity costs

British Airways headquarter is based in Heathrow airport, but there are complexity costs with suppliers abroad, especially from Asia, like Call BA a customer service in India. Another complex cost example, is the IT travel system including passenger service systems and web booking used by British Airways, which has changed after the merge with Iberia to gather all the bookings data. They minimize complexity costs, by reducing outsourcing, and building its network, for its reservation system, which is Amadeus; Iberia uses the same tool to make the interaction easy. As a result, they cut by 56 million pounds, the coast spending on IT system only.

 The cabin crew dress-up with Indian clothes, a way to counter the complexity coast

Transaction costs
According to the annual report of British Airways in 2010, the transaction costs directly associated with the acquisition is two million pounds. They reduce its transaction costs by squeezing the global distribution systems in Great Britain. An example of transaction costs is the fact that British Airways pays for American Express and other credit cards commissions, and for American Express, they obligate British Airways to use its credit cards with corporates clients.

Industry analysis: Porter

Threats of new entrance: Competitive environment. High regulatory requirement. High cost requirement.

Power of buyers: Long haul destinations. Availability of flights and seats are limited. Prices change according to demand.

Power of suppliers: Two aircrafts manufacturers (Boeing & Airbus). BA restricted by sole suppliers of fuel to the airport.

Competitive rivalry: BA caters for both long and short haul flights. Small difference between BA and its competitors in term of pricing and offer. The short haul market is more fragmented with many small players.

Threats of substitutes: There are few direct closed substitutes. Short haul flights: Eurostar+ ferry. Long haul flights: no notable substitutes.

Bargaining power to those:

Potential entrants The level of the threat of new entrants is very high, and its very difficult to launch a brand in the air transport industry, because of the legal entry barriers sush as the competitive environment, high capital cost requirments. Buyers For the long haul distance, the buyers bargaining power is medium because cutomers do not have lot of choice, moreover the availabality of flights or seats is limited, it means that customers bargaining power depends of the productivity of the airline. However, when customers fly with British Airways they expect a high quality service, and thanks to yield management, the airline changes the price according to demand of customers during all year. Finally, the increase of Internet usage has amplified awarness and interactions of customers; actually, the majority of online consumers use price-comparisons sites before their purchase. Substitutes The bargain power of substitutes is very low, there are few direct closed substitutes on the short haul flights, Eurostar or a ferry are the only substitutes, however, there is no one notable for the long haul flights. Suppliers The main suppliers of British Airways and globally airlines industry are Airbus and Boeing, indicating their high bargaining power, the both are the main aircraft manufacturers in the world, and they have high interest and big impact on the company and vice-versa. British Airways has only one fuel supplier meaning it also has power over the decisions made by British Airways. Moreover, there are also fuel companies, which have a high bargainig power against British Airways, while the oil prices still fluctuate, and then the exchange currency affects directly British Airways. Industry competitors Actually, the airline industry containts three main alliances with a large range of airlines worldwide, that growth competition between airlines, The increase of oil prices and the financial crisis have pushed the airlines to combine with each other to solve these issues, which has raised the competition in the whole industry, For

example BMI and Brussels Airlines. British Airways is facing a strong short-term market competition from smaller businesses such as Easy Jet or Ryanair; the following figure shows the rapid growth of these airlines in term of revenues, passengers and profit before tax. But the restricted number of airlines and high fares charged mean lower international competition for British Airways. However, competition remains high and intensive within Europe. Furthermore, British Airways caters for long haul and short haul flight; within long haul there is little differentiation with the competitors in terms of pricing and service offering.

Market dynamic
Market definition
The market of British Airways is the transport business, an area where it sells its products thanks to its network that contains travel agencies, tour operators. Transport is a need for a large range of people, even if the crisis settled in many sectors, people will also continue seeking a way to travel. As British Airways is part of the transport sector worldwide with a high quality services, the group has to offer different solutions on every situations to optimize they offer and so their turnover.

Risk of Myopia
The risks of myopia in British Airways are the threats from the low-cost carriers because their market shares still grow and consumers change their behaviors; moreover, they can be also substitutes on the future. And British Airways can lose its customers if it focuses only on shareholders, or in high quality services on the first classes, forgetting the economy classes, which do request a smaller level of implication.

Risk of presbytia
The risk of presbytia in British Airways will be the change of consumers behavior who want a better flying experience, and focusing a lot on the new way of consummation. It can leads to a lost of market share.

Market phases

British Airways is in different stages according to geographical area, concernig the short haul routes within Europe, it serves almost all of its segments, and its at maturity stage, its because of both the high competivity between carriers, and the stability of demand. For the long haul routes, British Airways is at shake out stage. A proof of that, is the Indian market for example, which is the most profitable market after the United States of America outside the United Kingdom, thanks to its 30 million Indians living abroad, and the growth of Indian economy.

Market differenciation or segmentation

British Airways does make a segmentation market dynamic, it offers a high quality of services onboard, which is differs the most from the competitors, it proposes a large range of products for different customers, and then it adapts the offer with the demand.

Market strategies
In order to take a large market share, British Airways had done several operations, like developing global products, buying stakes in other airlines to expand its domination, launching other destinations, raising the fleet by purchasing aircrafts, creating a worldwide alliance, coordinating its management practices, advertisement and promotion in many channels, improving customer service at every level of a passengers journey, and dominates the traffic in Londons Heathrow airport, especially Terminal 5, which its infrastructure are controlled by the airline, an opportunity to establish a dominant position. As a result, British Airways product range dominates supply and covers several market segments, of the international air transport industry. In the market of airlines, the market share of British Airways grew to reach maturity in term of short long haul routes, they serve each segment with a specific product, but after 2007, low coast carriers took more and more parts from airlines market. On the long haul flights, British Airways has been attempting to implement a globalization strategy leading to domination of the international airline market. But for the short haul flights, the domination of low-coast carriers like Vueling, EasyJet or Ryanair still grows. Since 2007 British Airways has had a lost of 5% of market share, but low-coast carriers earn 24% of market share.

 Concerning the differentation strategy, we saw previously that British Airways takes advantage from lurning curve to reduce its coast. For example, to well develop their services onboard, the flat bed was an asset destined to first classes, it differs from other airlines, and the effect of this strategy was the positive image given by the company, and the consumers approved the quality of services in-flight during routes.

Organization
Structure

If you fly with British Airways, you find standardization worldwide of all their products and services proposed for specific classes onboard or on the ground. The organization has more than 40,000 employees to work for the company has divided management-level positions into ten departments and each department has own subordinates. The organizations departments include investment and alliances, marketing, planning, ground operation, engineering, flight operations, IT, finance, law, and human resources. The functional organization of British Airways

Engineering

Information and Finance

Human resources

Law

Marketing

Ground operations

Investment & Alliances

Flight operations Customer service Culture

Sales

At the beginning, King and Marshall found an airline that was in the transportation business and was not customer oriented. British Airways is changing its corporate culture by changing its headquarters building. The old multistory headquarters near Londons Heathrow Airport reinforced hierarchical and bureaucratic values that the airline was trying to cast off. The new

headquarters is designed with a central village square and work units spreading out from it. Executives are located with their units, not cloistered on a separate executive floor. Physical structures and spaces, such as British Airways village square headquarters, often symbolize the companys underlying values and beliefs. The size, shape, location, and age of buildings might suggest the organizations emphasis on teamwork, risk aversion, flexibility, or any other set of values. Values of British Airways employees: The values are to be: Safe and secure Honest and responsible Innovative and team spirited A good neighbor-concerned for the community and environment Profile of individuals British Airways gives incentive program to improve the commitment of their employees, and programs for selected positions, for example it also gave Ipad to their air cabin members to have all information about each passenger.

Apart from the technical side of the flying operations, responsibilities include the recruitment, training and standards of 3,000 pilots and the safety training and standards of 14,000 cabins crew. All of the employees have a lot of competencies, and experiences in the airline industry, and managers are most of time graduated from in famous business school and universities in the world. Leadership models British Airways has European organization model based on commitment, wellbeing and culture, they are in the core of its employees. There is also a strong socialization of values in the company.

Value creation
Strategic positioning school because she looks where the market growth and the destinations that are more demanded by customers. On the following chart, we can notice that the profitability of British Airways is good enough thanks to its Value creation index bigger than 1. However, Us Airways has a more comfortable place than its competitors thanks to its high ratios. In fact, the figures show that the share price of Us Airways bring back more than the share price of British Airways. It generates cash because its return on equality is 134.64.