MGMT 321Class 6Strategy: MGMT 321 Class 6 Strategy Agenda Corporate and competitive strategy


First Exam: First Exam Multiple Choice Mean = 24.2 (81%) High = 30.0 (100%) Low = 14.0 (47%) The essay questions are still being graded. We will try to post grades on Friday.


Office Hours to Go Over Your Exam: Office Hours to Go Over Your Exam Corey Bowers Monday, April 24th from 1:00-3:00p in 174 Lillis Tuesday, April 25th from 3:00-4:00p in 458 Lillis


The Concept of Strategy: The Concept of Strategy The primary task of top management is thinking through the mission of the business – that is, asking the question: “What is our business and what should it be?” Peter Drucker Strategic planning involves identifying the current business of a firm and the business it wants for the future, and the course of action or strategy it will use to pursue its objectives


Strategic Management Process: Strategic Management Process


Strategic Management Process: Strategic Management Process Strategy begins with a clear statement of direction Vision statements


Collins-Porras Vision Framework: Collins-Porras Vision Framework


Illustration of a Mission Statement: Giro Sports Design: Illustration of a Mission Statement: Giro Sports Design


Illustration of a Mission Statement: Giro Sports Design: Illustration of a Mission Statement: Giro Sports Design Core values and beliefs Great products. Innovative, high quality and unquestioned best in its category Great customer service. Service standards are as stiff as our product standards. Treat customers as we would our friends. Golden Rule. Treat others as we would like to be treated.


Illustration of a Mission Statement: Giro Sports Design: Illustration of a Mission Statement: Giro Sports Design Core values (cont.) Teamwork. No individual is indispensable. Think we, not I Best effort. Do your best in every task undertaken. Strive for an A, not a B+ Details. The little things matter. God is in the details. Integrity. We are honest. We honor our commitments. We are consistent and fair.


Illustration of a Mission Statement: Giro Sports Design: Illustration of a Mission Statement: Giro Sports Design Purpose Giro exists to make people’s lives better through innovative, high quality products


Illustration of a Mission Statement: Giro Sports Design: Illustration of a Mission Statement: Giro Sports Design Mission (circa 1990) Giro’s mission is to be a great company. We aim to be the most respected and admired company in worldwide cycling by the year 2000


Strategic Planning: Strategic Planning Industry analysis Company analysis SWOT, core competence and sustainable competitive advantage Corporate-level strategies Competitive strategies


Illustrating Competitive Industries: Illustrating Competitive Industries Warren Buffett, Chairman and Chief Executive Officer of Berkshire Hathaway, was asked by a shareholder at an annual meeting: “What is the fastest way to have a stock portfolio worth $1 million?” How do you think he answered?


Competitive Industries: Competitive Industries Buffett’s answer: “Invest $10 million in an airline stock”


Warren Buffett on the Airline Industry: Warren Buffett on the Airline Industry “If you go back to the time of the Kitty Hawk, net, the airline transport business in the U.S. has made no money. Despite putting in billions and billions and billions of dollars, the net return to owners from being in the airline industry, if you owned it all, and if you put up all this money, is less than zero. The first flight of the Wright Brothers was one small step for for mankind, and one huge step backwards for capitalism.”


Competitive Industries: Competitive Industries Airline industry is one of the most competitive industries in the U.S. We can use this industry to help illustrate the strategy concepts from the text To understand the airline industry today you need to go back in its history to see how it got to where it is


Brief History of the Airline Industry: Brief History of the Airline Industry Airline industry was regulated until 1978 Civil Aeronautics Board set fares and awarded routes Industry dominated by a small number of established airlines Significant barriers to entry CAB protected market share by controlling routes and ensuring profitability by setting fares


Flying in a Regulated Industry: Flying in a Regulated Industry


Brief History of the Airline Industry: Brief History of the Airline Industry Keys to success under regulation Small airlines: High traffic, point-to-point routes like New York to Miami Large airlines: Large number of long distance routes (e.g., New York to San Francisco) with high schedule frequency, dominant market share, and a distance-based fare structure


Effects of Deregulation: Effects of Deregulation Deregulation changed the competitive landscape in fundamental ways


Brief History of the Airline Industry: Brief History of the Airline Industry Keys to success under deregulation Hub and spoke systems with schedule frequency that yielded cost and market economies, as well as barriers to entry Perceived service advantage, including frequent flyer loyalty programs and alliances with other airlines Powerful reservation systems that allowed airline to dominate the distribution channel


Route Systems Before and AfterDeregulation: Route Systems Before and After Deregulation


Brief History of the Airline Industry: Brief History of the Airline Industry Keys to success under deregulation Hub and spoke systems with schedule frequency that yielded cost and market economies, as well as barriers to entry Perceived service advantage Powerful reservation systems that allowed airline to dominate the distribution channel


Brief History of the Airline Industry: Brief History of the Airline Industry Not all airlines adjusted their strategies to compete successfully under deregulation Airlines that failed or who came close to it Braniff Western Eastern Pan American TWA Airlines that survived American United (just emerged from bankruptcy) Delta (currently in bankruptcy) Northwest (currently in bankruptcy) Continental (turnaround after two bankruptcies)


Effects of Deregulation of the Airline Industry(New York Times, January 23, 2005): Effects of Deregulation of the Airline Industry (New York Times, January 23, 2005)


Brief History of the Airline Industry: Brief History of the Airline Industry New entrants like Southwest and People Express competed with major airlines by: Managing costs and lowering fares Initially avoiding direct competition in hub cities by flying point-to-point routes Focusing on new segments of the traveling public (“sandals and backpacks”) Southwest succeeded, People Express did not


Brief History of the Airline Industry: Brief History of the Airline Industry Established airlines competed with new entrants in a number of ways: Established hubs (“fortress hubs”) in strategic locations Frequent flyer plans that created deep loyalty among frequent travelers Centralized reservation systems that favored their own flights over others and allowed low fares on selected routes and days International alliances that increased loyalty of business travelers


Strategic Alliances in the Airline Industry: Strategic Alliances in the Airline Industry


Brief History of the Airline Industry: Brief History of the Airline Industry Airline industry is facing a fundamental restructuring today as the result of three forces Shrinking high-end demand for air travel beginning in late 2000 Increased price sensitivity of business travelers Technological alternatives to air travel Entry of a number of low-cost carriers who are now large enough to attack in established hubs Increased transparency of alternative airline offerings and fares made possible by the internet and other technologies


Brief History of the Airline Industry: Brief History of the Airline Industry Established airlines made a fundamental mistake in responding to deregulation that remarkably worked for 25 years but that is now catching up with them: Focused on managing revenues by expanding service instead of lowering costs


Brief History of the Airline Industry: Brief History of the Airline Industry


Brief History of the Airline Industry: Brief History of the Airline Industry


Porter’s Five Forces Model of Industry Competition: Porter’s Five Forces Model of Industry Competition The five-forces model helps managers understand: the competitive intensity of an industry identify competitive advantages given industry competition


Porter’s Five Forces Model of Industry Competition: Porter’s Five Forces Model of Industry Competition


Applying the Five Forces Model to the Airline Industry: Applying the Five Forces Model to the Airline Industry Industry competitors Many other airlines Potential entrants Relatively lower barriers to entry than under regulation Power of suppliers Low to high Power of buyers High Substitutes Other forms of transportation (trains, cars)


What would be an ideal industry according tothe Five Forces Model?: What would be an ideal industry according to the Five Forces Model? Industry competitors Few or none Potential entrants High barriers to entry Power of suppliers Low Power of buyers Low Substitutes Few or none


SWOT Analysis: SWOT Analysis


Hypothetical SWOT Analysis for an Airline: Hypothetical SWOT Analysis for an Airline


TOWS Matrix: TOWS Matrix


Core Competence: Core Competence “The collective learning in the organization, especially knowing how to coordinate diverse production skills and integrate multiple streams of technologies” what an organization does really well or better than anyone else Canon: fine optics, precision mechanics, microelectronics WalMart: managing the value chain Honda: manufacturing internal combustion engines


Sustained Competitive Advantage: Sustained Competitive Advantage Superiority Better than competitors (e.g., Federal Express in tracking packages) Inimitability Advantage hard to copy (e.g., superior service at Southwest due to loyal employees) Durability Long lasting advantage (e.g., patent protection) Nonsubstitutability Hard to satisfy need by other means (e.g., encyclopedia Britannica and the Internet) Appropriability Ability to capture the profits that can be made in the industry (e.g., Dell’s operating margins are above 8% while HP, Apple, and IBM margins are slim or non-existent)


Corporate-level Strategies: Corporate-level Strategies Focus on two critical questions What business or businesses are we in? What business or businesses should we be in?


Corporate-level Strategies: Corporate-level Strategies Concentration Single business Vertical integration Multiple businesses that are vertically related Diversification Related Unrelated


Vertical Integration Strategy: Vertical Integration Strategy Airlines can operate multiple, vertically integrated businesses Airline reservation service Packaged travel services (e.g., tours) In-flight meal preparation Airline Rental cars Hotels


Corporate-level Strategies: Corporate-level Strategies Concentration Single business Vertical integration Multiple businesses that are vertically related Diversification Related Unrelated


Diversification Strategy: Diversification Strategy Related diversification e.g., airline manufactures jet engines or prepares meals provided on flights to other airlines Unrelated diversification e.g., airline also in the automobile insurance business


Corporate-level Strategies: Corporate-level Strategies Most U.S. airlines operate with a concentration/single business strategy Achieving growth while concentrating in a single line of business Market penetration Geographic expansion Product development Horizontal integration


Generic Competitive Strategies: Generic Competitive Strategies How will we compete in the businesses we are in? If a company is in multiple businesses, they may have multiple competitive strategies Even within a single business, more than one competitive strategy is often essential


Generic Competitive Strategies: Generic Competitive Strategies Cost leadership Low-cost leader in an industry Differentiation Unique along some dimension valued by consumers Focus Compete in a narrow market segment


Competing as a Low Cost Carrier: Competing as a Low Cost Carrier Key to success is aligning everything that you do with lower costs Southwest is the most successful domestic low cost carrier


Low Cost Strategy: Southwest: Low Cost Strategy: Southwest


How Major Airlines are Cutting Cost to Compete: How Major Airlines are Cutting Cost to Compete Layoffs Wage and benefit concessions Eliminate or reduce pension contributions Eliminate unprofitable routes Outsourcing maintenance Reduce service or make passengers pay for it (e.g., in-flight meals, entertainment, exit row seats)


How Major Airlines are Cutting Cost to Compete: How Major Airlines are Cutting Cost to Compete The “Catch” You can’t control everything Fuel costs have risen to a level where you lose money on every passenger you fly


Rising Jet Fuel Prices: Rising Jet Fuel Prices


How Major Airlines are Cutting Cost to Compete: How Major Airlines are Cutting Cost to Compete Fuel Hedging Airline Through Price per (% hedged) period Barrel American 9% Sept. 30, 2004 $32 4% Dec. 31, 2004 $30 Continental 45% Sept. 30, 2004 $36.4 45% Dec. 31, 2004 $36.5 Southwest 80% Dec. 31, 2004 $24 80% Thru 2005 $25 Source: Wall Street Journal, August 19, 2004


Low Cost Strategy: Low Cost Strategy What is the lowest cost airline in the world?


Low Cost Strategy: Low Cost Strategy


Low Cost Strategy: Ryanair: Low Cost Strategy: Ryanair London (Stansted) to (April 20, 2006) From From Salzburg £0.79 Barcelona £0.79 Genoa free Berlin free Frankfurt £0.79 Seville £2.79 Rome £0.79 Palermo £2.79 Fares do not include taxes, fees and charges not to exceed £15.20 £1 = $1.7462 $1 = £0.5727


Low Cost Strategy: Ryanair: Low Cost Strategy: Ryanair How Ryanair Manages Costs Fleet of new, fuel efficient planes Fly to remote airports No frills Eliminated window shades and seat-back pockets Installed seats that don’t recline No refunds for tickets (Ryanair pockets the taxes and airport fees if you miss a flight) Employees pay for their own training and uniforms Flight attendants paid commissions for in-flight food sales, allowing the airline to reduce their salaries Rigid checked baggage policy and high fees for excessive baggage Internet ticket sales


Low Cost Strategy: Ryanair vs. Southwest: Low Cost Strategy: Ryanair vs. Southwest Ryanair Southwest Cost per passenger $41.90 $83.04 Net profit margin 19% 7.4% Source: Wall Street Journal, July 1, 2004


Differentiation Competitive Strategy: Differentiation Competitive Strategy Differentiate yourself from competitors along some dimension of value to customers


Differentiation Competitive Strategy: Differentiation Competitive Strategy Customer Value Proposition Fly people: where they want to go when they want to go there on-time in comfort with amenities pleasant experience


Importance of market segments: Importance of market segments High Fractional Jets United American Cost Delta Continental Northwest Jet Blue Southwest Low Ryan Air Low High Service


Some airlines operate in each market segment: Some airlines operate in each market segment High Delta Air Elite Cost Delta Low Song Low Service High


Differentiation Strategy: Differentiation Strategy


Differentiation: Differentiation Jet Blue entered market as a low-cost competitor to Southwest but differentiated itself based on service Hub in major metropolitan area (New York City) Leather seats In-seat entertainment system


jetBlue Route Map: jetBlue Route Map


Generic Competitive Strategies: Generic Competitive Strategies Cost leadership Low-cost leader in an industry Differentiation Unique along some dimension valued by consumers Focus Compete in a narrow market segment


Focus Strategy: Focus Strategy


Focus Strategy: Focus Strategy


Airline Industry: Airline Industry Interesting Question If so many airlines like Delta, United, Northwest and US Air are doing so poorly in an industry with excess capacity, why haven’t more airlines gone out of business? In an efficient market, wouldn’t capacity (supply) adjust to meet demand?


Airline Industry: Airline Industry Answer They are being financially propped up by airline leasing companies


Risks of Competitive Strategies: Risks of Competitive Strategies


Importance of multiple competitive strategies: Importance of multiple competitive strategies To avoid being attacked by competitors it is useful to have more than one competitive advantage e.g., low cost and differentiation based on service


The Airlines Industry: Sometimes Nothing Goes Right: The Airlines Industry: Sometimes Nothing Goes Right


Next Class: Next Class Management clinic Assigned case: “Stick to the core or go for more”