Assignment concerning ALITALIA strategic analysis

The Alitalia Group is a company which is concentrated on supplying passenger and cargo air transport services on domestic, international and intercontinental routes. The passenger traffic is rather expanding in recent years. Revenues of Alitalia are growing, but in rather steady rate. On the other hand Alitalia did not gain profit. It reported almost 211 mln EURO net loss in 2007.

The highest expansion of new customers is observed in intercontinental flights. Of course we should mention about recent volcano eruption which is highly unfortunate for airlines. Therefore oligopolistic market, which can seem very strong, suddenly was seen as very fragile due to unpredictable natural forces. Alitalia used to be highly controlled by Ministry for the Economy and Finance, but they started to sell their controlling stake. The strategic plan for recent years included changes in trend for losses. The plan also stated that some actions are impossible for Alitalia due its current financial situation. The Group of Alitalia needs urgent reorganizations and changes in its industrial status. Now, we will examine how Alitalia can establish a blue ocean strategy.

All graphics in the essay is taken from the case material for Alitalia.

How can Alitalia establish a blue ocean strategy? The plan consists of e.g. using economies of scale. It could be reached by more integration and concentration in a very limited number of hub carriers. On the other hand that kind of operating in airlines industry allows to fill niches and operate inside them as monopolistic company. Alitalia for example has filled a niche of off the main international routes. That kind of routes are rapidly expanding and are characterized by growing demand. But Alitalia suffers from bad or not enough corporation rules. It makes Alitalia to be considered as very local and marginal airline. Actually, there are some problems with ownership in Alitalia and sudden decisions cannot be made quickly now. But Alitalia has to have some plan. The goal is to keep sustainability and continue business activity. To do this, Alitalia must definitively cut the losses and erosion of equity. It could be achieved by allowing some third part entity.

Eliminate: Which factors can be eliminated that the industry has long competed on? Consolidate the cargo business on Milan Malpensa, Flights with very negative results without prospects for recovery.

Raise: Which factors should be raised well above the industrys standard? Off the main route international flights, Low cost activities, Long haul charter, Activities on Rome Fiumicino airport, Efficiency and productivity of the fleet, Quality of products, Efficiency of the organizational structure, Operating and managerial leadership in company. Create: Which factors should be created that the industry has never offered? New rules, Better operating activity, New third part entity, Point to point activities with dedicated aircraft, Entries into new segments in agreement with Fintecna and the labor organizations.

Reduce: Which factors should be reduced well below the industrys standard? Feeding two hubs effectively and productively, Losses and eruption of equity, Short medium haul aircraft.

The plan has great opportunities to be realized. The average annual rate of passengers growth is expected to be 3.8%. The cargo activity is going to be expanding 4.5% yearly. On the other hand the fuel is going to be more expensive, so it raises the costs. Diversified geographical spread is very important strength of Alitalia. By direct sales it makes great opportunity to expand revenues. Also passenger traffic in Asia Pacific in expanding. On the other hand Alitalia must face much low cost airlines competition and currently there is worldwide economic slowdown. Alitalia should aim much on its organizational structures which causes low profitability and causes decrease in cash and cash equivalents. Alitalia should also consider that intense competition could lead to price

discounting which could reduce Alitalias revenues. Alitalia is also going to switch to new aircraft fleet. Currently it has 145 aircrafts and plan to change or upgrade 75 of them, which makes a great part of its fleet. The economic slowdown has a great impact on travelers and holiday passengers. Aiming more on cargo flights can be a good way to reduce economic slowdown impact. Also air flights can be reduced by high speed rail connection. But it threats mainly domestic or European market. International flights are still the fastest way of traveling through different continents. We will now discuss some strategic canvas comparing the proposed strategy and current offerings of major competitors of Alitalia. The industry profile of airlines in Italy consists in 42.3% of domestic flights and in 57.7% in international flights. Therefore even such a country like Italy produces much demand for flights. It is important fact because for example Italy and Poland has similar land, but people in Poland travel by bus or rail. On the other hand it is known that airline traveling is very popular in United States. Also the industry volume of airlines in Italy expands recently. From 2003 to 2007 an average growth rate of passengers (total for the whole industry) is 8.8% yearly.

The airline industry in Italy is being deregulated but still there is much bureaucracy. Much consumers are holiday travelers. The whole industry is very fragile to fuel prices. Also the industry needs professional workers and ticket agents. The airline industry is very dependent on proper workers, therefore almost 40% of costs are thought to be generated by staff. The industry is very labor intensive. The leading companies on Italian market are: Volare, Windjet, Air One S.p.A. and considered Alitalia. Windjet confirmed 20% growth in the total traffic in comparison of first half year 2006 to the same period in 2005. While its turnover grew in 34%. From 2003 Alitalia generates net loss, but also stable revenues.

The forecast for years 2007 2012 states that the value of the industry market will be expanding in an average 12.4% yearly tempo. It also forecasts 4.9% yearly growth in passengers numbers. The population of Italy is considered to stay with no important changes at 58 mln citizens level. Italian GDP is thought to raise c.a. 1.6% yearly. The inflation is considered to be no more than 2.1%. The strategy canvas is the central diagnostic and action framework for building a compelling blue ocean strategy. The horizontal axis captures the range of factors that the industry competes on and invests in, and the vertical axis captures the offering level that buyers receive across all these key competing factors.1

http://www.blueoceanstrategy.com/abo/strategy_canvas.html

Italy makes 12.4% of European airlines market, while for example France makes 9%. So even whole two markets connects makes only c.a. 22% of European flights market. Only a bit more than whole United Kingdom market or Germany one. On the other hand Air France KLM has very strong fleet operations. It is threaded by consolidation in the airline industry and suffers from declining profits and margins which is similar to Alitalia situation. Therefore potential synergy with Air France KLM could be beneficial for Alitalia. On the other hand much benefits could be made by synergies with Ryanair Holdings plc. Both Alitalia nad Ryanair could cooperate in low cost flights. Also United Kingdom market is much more than French one.

Now, we will study the Brandenburger and Nalebuff net value model.

Alitalia could benefit form low cost flights and offer much nice discounts for holiday travelers to off route countries. The strength of Alitalia is e.g. diversified geographical spread. Many current European airline companies are specialized in particular markets. Therefore competition on European market is not so efficient. Alitalia should realize its plan, which was previously mentioned, but it could also make some synergies with Ryanair in order to offer low cost flights for European holiday travelers to off route countries. Therefore Alitalia should use its ticket agents to set up attractive holidays in new countries. Therefore Alitalia should create demand for the product which it would itself supply!

What is the new elevator test for the proposed Alitalias offering? To answer that question we will do some elevator test. First of all let us consider the question: What is the new product for? We will examine who will be the target customer of new product. The target customer of the new product will be young people and middle age people. The products is addressed to so called middle class. People who can afford abroad holidays and want to visit new countries. It is also addressed for

young people who are interested in some off route tracks and working people who were young when cultural revolution was beginning but now are after some years of working in corporations etc. and probably would like to take a little rest from work or spend their holidays in some new way. That kind of holidays can be seen as trendy and alternative for traditional holidays in famous countries. It is know that in modern society visiting alternative countries is seen as trendy and very exciting activity. Since 60s people in United States and Europe were excited about Far East or other cultures, etc. Anyway that kind of holidays are thought to be very expensive and younger people (which are interested in such kind of activity) cannot afford them. On the other hand older people who have much money prefer traditional holidays.

Alitalia has a diversified geographical spread so it could quickly and simply start to offer flight connections with different countries. On such kind of market there is no important competitors, therefore it would be easy to dominate that kind of market. Also by cooperation with tickets agents Alitalia could provide affordable staying in such countries, offer visiting tours, etc. The key factor would be, why people should fly with Alitalia. The answer is because Alitalia will advertise such holidays as very trendy and funny way to spend your time. Alitalia would transport you form your home to e.g. village in Pacific. It means the new products will be offered with cooperation with some other companies, but Alitalia has a brand name and connections with many agents. People would have safe holidays without risk of hidden prices, new company, etc. The very known company would offer them something completely new and in very reasonable price. Unfortunately Alitaila suffers some bad financial conditions therefore it would be better to offer new product with cooperation with some other company. E.g. previously stated Ryaniar. Actually the current market alternatives are cheap flights to popular cities and very expensive trips to exotic countries e.g. Peru, etc. The trip to Peru costs

much more than trip to other European country and the difference in cost is much more than the difference in distance. Therefore fuel is not the main generator of the cost. There are no compact affordable trips to unknown places from Europe. Therefore such flights could be just a brand new market segment.

Which value discipline should Alitalia pursue? We will discuss the topic basing on Treacy and Wiersema value discipline. It was introduced by Treacy and Wiersema in their book The discipline of market leaders (1995).

Picture form: http://www.suggestsoft.com/images/http-www-sqakki-comvaluedisciplines/value-disciplines-software-tool.gif The first value discipline is called operational excellence. It is based on excellent operations and providing reasonable quality at affordable and rather low prices. The strategy is based on efficiency. It is usually used by international industries. The second value discipline is called product leadership. It is aimed on innovations and exploring brand new products. The strategy is very dynamic one. It focuses on development and innovations. This strategy is a risky one, because it can generate much cost or can be seen as va banque market game. The efforts of delivering innovative product may be not seen by potential customers, therefore the cost is generated and no revenues are gained.

The third value discipline is called customer intimacy. It is aimed on delivering the customer the best attention and service. The strategy bases on individual customer preferences and professionalism. This strategy is very good for small companies. Tailoring the products for each customer is very time costing and needs much labor. Alitalia should concentrate on all three disciplines. Due to rivals Alitalias products should be customer friendly and people should think that they can individualize their trip, etc. of cours it would be unreasonably expensive for Altialia to focus on it as main goal. But Alitalia should try to use proper advertisement or low cost bonuses to seem that their products are tailored individually. For example each passenger before the flight should have an option to choose a free paper form e.g. 10 different newspapers. Alitalia should offer papers for housewives, photographers, travelers, businessman, etc. Also much choice of beverages on the desk should be offered. And the most important thing: different routes and trips should be offered. For example a tariff busy: expensive but direct and fast flight form one city to another with an option of ready taxi awaiting. A tariff: lazy: cheap but with no direct flights, but with an offer of one day stay in hotel and visiting the city, where the stay is needed. The value discipline of product leadership (in off route trips) could bring Alitalia much revenues, but Alitalia suffers bad organization and net loss. Therefore this strategy could be made with cooperation with a third part entity and not as the main goal. Therefore by deduction the value discipline called operational excellence is the best value discipline that Alitalia should pursue. It is also connected with stated bad organization in the company. Due to the Plan for 2008 2010 Alitalia should direct on that value discipline and in example should focus on: greater efficiency of the organizational structure, greater efficiency and productivity of the fleet, reduce unprofitable flights and expand profitable ones, strengthen of the operating and managerial leadership in company, entry into the various business segments.

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20 detailed and measurable SMART objectives for Alitalia SMART Specific: Measurable: Attainable: Relevant: Time bound: Significant, Stretching, Simple Meaningful, Motivational, Manageable Appropriate, Achievable, Agreed, Assignable, Actionable, Actionoriented, Ambitious Realistic, Results/Resultsfocused/Results-oriented, Resourced, Rewarding Time-oriented, Time framed, Timed, Time-based, Timeboxed, Timely, Time-Specific, Timetabled, Time limited, Trackable, Tangible http://en.wikipedia.org/wiki/SMART_criteria

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OBJECTIVES: REVENUE GROWTH 1. Total revenues 2. Total net income (total net loss) 3. Total operating costs NEW REVENUE SOURCES 4. Revenues form new products 5. Net income from new products 6. Operating costs from new products 7. Revenues form low cost activities 8. Revenues from long haul charter 9. Other costs from new products EXPANDING SALES TO EXISTING CUSTOMERS 10. Number of sales of new product 12. Number of sold tickets 13. Number of flights to and from Rome Fiumicino 11. Total revenues growth PRODUCTIVITY 12. Number of flights with very negative results 13. Number of long haul aircraft 14. Average revenue form low cost product (one flight) 15. Average revenue (total revenues / number of tickets sold) COST OPTIMIZATION 16. Average cost of new products 17. Operating costs / Total revenues ASSET UTILIZATION 18. Change in total assets 19, Number of upgrades in Airbuses 20. Public relations (points from poll delivered to customers)

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