Reasons to diversify in the airline business british airways

Reason to Diversify in a business

(A case study of British Airways)

SID NO: 1246209

INTERNATIONAL BUSINESS ENVIRNOMENT AND STRATEGY

PART 2 OF THE PRESENTATION

MOD001148

(Word count: 2,500)

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Table of Contents

1.0: BACKGROUND..........................................................................................3

2.0: THEORETICAL FRAMEWORK......................................................................5

3.0: ANALYSIS................................................................................................7

4.0: ANSOFF MATRIX......................................................................................9

5.0: CONCLUSION AND RECOMMENDATIONS...................................................11

REFERENCES................................................................................................13

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1.0: Background

The overall purpose of this study is to examine the reasons to diversify in a

business. This study has chosen British Airways (BA) and there are a number

of reasons behind selection of this organisation. BA is one of the leading

scheduled premium international airlines and also a part of International

Airline Group and full service global airline company (Data Monitor, 2012)

after merge with Iberia. They provide world-class air cargo service worldwide,

largely combination with its planned passenger service. The airlines operate

over 400 destinations worldwide including Europe, USA, Asia, Africa and Latin

America etc. it has employed over 38,000 employees around the world and

headquartered in Harmondsworth, UK (BA Annual Report, 2013).

The following is the highlights of financial performance as of 31st Dec 2012:

The Revenue was up around 8.4% to £10,827 million compared to

previous year

Operating profit was £233 million, however 55% was decrease

compared to previous year (FY2011) (BA Annual Report, 2012).

The company has diversified their business through two divisions, namely:

airline business and all other business (cargo operations and network

passenger). Having key business places in London with substantial its

presence at London City Airport, Heathrow and Gatwick (Data Monitor, 2013).

BA had 273 aircraft in service as the end of FY 2012. During the 2012, the

company has carried 37,5800 passengers and hundred thousands of tons

(788,000) of cargo and consequently the load factor for passenger was 79%

whilst the total load factor stood at 72.90% (BA Annual Report, 2012).

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In addition, the company also has two subsidiaries, including BA Open Skies

and BA City Flyer. BA City Flyer activates a network of European services

and UK domestic Services from London City Airport. There were two

franchise partners including Sun-Air and Comair and they have been using

BA branding and flight codes (BA Annual Report, 2012’ Data Monitor, 2013).

British Airways has acquired British Midland Limited (BMI) in April 2012, which

belongs to Deutsche Lufthansa AG, (BA Annual Report, 2013).

Hence, this acquisition helps them to strengthening their existence at

Heathrow and also improves their financial performance as this acquisition

has already given position to operate 20 new routes from Heathrow in whole

2012 winter season (Data Monitor, 2013). BA is further investing around

£5billion over 5 years in new aircraft, elegant lounges, smarter cabins and

new technologies in order to make life more comfortable on the ground and in

the air.

Further in the year, they entered into a codeshare arrangement with Air Berlin

on more than 40 flights across Europe. In February 2012, British Airways and

Japan Airlines (JAL) announced plans for a new joint business between the

companies on flights between Europe and Japan (BA annual Report, 2013).

The company began consultation with trade unions in April 2012 on proposals

to integrate bmi mainline into its operations at Heathrow. In the following

month, the company announced a new route to Seoul in South Korea. During

the month, British Airways launched a new route from Gatwick, the UK to Las

Vegas, the US. In August 2012, the company announced plans to launch a

new route to Sri Lanka from Gatwick in FY2013 (Data Monitor, 2013). In

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September 2012, the company signed code-share agreement with West Jet

boosting its services to select destinations in Canada. During the month,

British Airways and JAL began a joint business agreement under which the

two airlines would share revenue on applicable flights between Europe and

Japan (BA annual Report, 2013). .

British Airways announced plans to increase its flights between Toronto and

London Heathrow in December 2012. During the month, the company

announced a new route to Chengdu in China. British Airways’ flew its first

Airbus A380 from Los Angeles to London Heathrow in March 2013 (BA

annual report, 2013). In June 2013, British Airways‟ signed a new agreement

with Bangkok Airways, allowing customers to fly to destinations in Thailand,

including Phuket, Koh Samui and Chiang Mai (Data Monitor, 2013).

2.0 Theoretical Framework

The choice of Porter’s strategy is stipulated by several reasons. The concept

of generic strategies was created in 1980‟s which is still widely accepted as a

business tool and platform for researches in the field of strategic

management. The model has a number of positive characteristics such as

“regard, precise structure, practicability, clarity and generality” (Shaw, 2011).

It signifies the three different strategic approaches: cost leadership,

differentiation and focus – the company can undertake to build a strong

competitive advantage by modification and outperform their competitors.

The airline industry has experienced a sharp price decline (up to 50%) caused

by a global economic downturn and also various other reasons such as

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terrorism, middle- east crisis in 2008-2009 (Data Monitor, 2013). As

mentioned BA’s profitability was 55% decreased in FY 2012 compared to FY

2011 (BA annual report, 2013). The strategy may help BA to improve their

profitability and competitive advantage as it was already mentioned above. It

is important to highlight the fact that Porter’s strongly advises companies to

pursue just one strategy at a time. If a firm does not succeed in doing so, it

may get stuck in the middle, which will result in low profitability and inability to

achieve competitive advantage.

The key priority of a company is to have a competitive edge and increase

market share, which is: ‘A firm pioneers a major diversification’. The invention

of a new product or technology is an attempt of the simultaneous pursuit of

low cost and differentiation strategies. The diversification with products

portfolio may give BA an opportunity to lower the costs while at the same time

widen the spectrum of its differentiation activities.

However, BA will possess an advantage over its rivals unless it supplies the

market with a unique offering. Once the competitors manage to replicate the

diversification on products and services, the company will return to the stage

when it has to decide on which one of the generic strategies it will be pursuing

(Payne et al, 2011).

Furthermore, this study will use Ansoff Matrix to identify the business growth

by diversifying in new and existing market, which suggests that the growth of

the company will be based on whether it existing products and market new

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product in new or existing markets. It has four matrix and very useful to

examine the business growth and expansion (Shaw, 2011). Hence, the two

models (Porter Generic Strategies and Ansoff Matrix) will examine the

reasons to diversify in airline business (British Airways).

3.0 Analysis

This section reviewed the identified issues of British Airways by using Porter

Generic Strategies and Ansoff Matrix. It is absolute necessity for this report to

be able to distinguish between all three different generic strategies:

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Cost leadership:

The cost leadership strategy is probably the easiest among the generic

strategies to comprehend, since its focal aim is to minimize the company’s

costs, which is an essential for the British Airways as the company had

decreased profitability. In relation to BA, the company failed to provide lower

fare to their customers, as the company did not able to generate expected

profit. Hence, the company must look into cost savings by introducing new

routes. Payne et al, (2011), stated that the ability to maintain costs at a low

level brings the advantages in case of the price war which has been going

significantly in airline industry, since it would be much easier to drive

competitors out of the market( Puzell, 2011).

Cost leadership provides another significant benefit for the BA which is the

possibility to set the market prices which can be at or near the industry

average 43 as some passengers believes the farers of BA is not competitive.

The BA has failed to offer lower cost than its competitors and BA failed to

attract business travellers for short hauls flights. In relation to BA, the

company has stood in pure differentiation (Figure 1) and not even in low cost

category where Ryanair stood firmly in low cost category.

Figure 1: Position of the airlines

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Porter (1998), says that companies pursuing the cost leadership strategy are

expected to perform above the industry average due to the ability of diversify

the prices at lower or equal levels in comparison to the closest competitors in

the industry.

Differentiation

A firm pursuing this strategy will focus on supplying the market with a unique,

not yet provided, offering. In contrast to the cost leadership strategy,

differentiation approach deals mostly with the external business environment,

since it is seeking appropriate and most suitable ways of aligning their

services and products to meet unique customer requirements (Proctor, 2010).

Miller (2009) argues that diversification can be another way of accomplishing

a low cost position on the market and the reason behind to increasing

profitability and market share. The BA has increased diversification in

geographic presence in worldwide. The company serves 400 destination

globally and provides both cargo and passenger service. Hence, the revenues

generates significantly, for instance UK (largest geographic region) alone

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contributed 44.3% to the total revenues in FY 2012 (BA annual Report, 2013).

Further, total 19.9% revenues comes from the Canada and US and

Continental Europe provides around 16.4% (Data Monitor, 2013). Thus, a

diversified geographic existence provides the BA more opportunities for

accomplishing important revenue growth. However, there are more

geographic presence need to be justified, for instance diversifying more cities

in China (Xonhgi), India (Calcutta, Uttar Pradash). Therefore, it will help to

reduce the risk in specific market including socio-economic and geo-political

reasons and enables a strong positive universal image of the BA.

Focus

This type of a generic strategy is directed on targeting and supplying a certain

group of customers, segment of the product line or even geographical

market.59. However, BA has not been able to target business customers for

short haul flight because BA has been treated as a luxury flights. The focus

strategy is used in a combination with cost leadership, differentiation. While

the cost focus is based on defining the behaviours of price sensitive

consumers in specific segments, the differentiation focus is based on

providing unique offerings to targeted segments ( Murry, 2008). In case of

choosing one of the above described focus strategies by BA, it is necessary to

be ascertain that the offering a company is willing to target a specific segment

with diversification both product and service and geographic portfolio.

However, the company has won the first place in the category of ‘Favourite

Airline’ and it was given by the ‘Globe Travel Award’ in 2012. In addition, BA

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has won gold award for best UK based airline in March 2012 ( Data Monitor,

2013).

4.0 Ansoff Matrix

Figure 2: Ansoff Matrix Model

Ansoff Matrix consists of four conditions:

Market Penetration: BA already operates in various existing market but

decline profit by 55% in FY 2012 compared to previous year. Therefore, BA

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needs to expand their e-service in Far East, some European countries, EEA,

Middle East, China and India. However, the company increased 9% growth in

South East Asia and 8% growth in Eastern European countries in FY 2011

(Data Monitor, 2013).

Market Development: Ansoff (1957) suggests that existing products sold to

new market help to improve business growth. For instance, BA was the best

performer with a 7% growth in Asia Pacific in arrivals (Data Monitor, 2013) as

they have introduces some routes in Asia Pacific in 2009. In addition, BA has

diversified their services such as, the company was trying to recover their

business customers from the Virgin Airline and also launched loyalty card for

its customers as a medium to draw more people to fly with the brand.

Product Development: Its involves the procedures utilized to bring new

products into new market (Barrows and Neely, 2011). For instance, the

company has introduced a new in-flight entertainment system in the Boeing

777-300 ERs in FY 2010 which has been able to develop a special cabin

where passenger can work, sleep and eat (BA Annual Report, 2013).

Diversification is a substantial business strategy that endeavors to improve

productivity and profitability by introducing new product into the market.

Hence, global company such as BA has collaborated with India’s King Fisher

in order to provide connecting flights in India’s various cities. Angwin et al

(2011) argued that traditionally, foreign product diversification is viewed as an

important strategic factor that influences many firm characteristics. In addition,

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Ansoff Matrix and Porters generic strategy gives the list of specific routes to a

diversified based competitive advantage grouped in four domains:

- Enhance the sources of uniqueness

- Make the cost of differentiation an advantage

- Change the rules to create uniqueness

-Increase BA market share

- Reconfigure the value chain to be unique in entirely new ways (Hill, 2008).

Although, BA has been successful many ways in diversification as it helps to

improve business growth. For instance, British Airways has awarded ‘Best

Short haul Airline’ and also awarded for best airline for customer service as

those were hailed for the company’s diversification on services.

5.0 Conclusion and Recommendations

In conclusion, the above discussion has clearly indicated that there are a

number of reasons behind the business broadening such as market

development, business growth, increase market share, increase profitability,

and most importantly competitive advantages in the market. The pursuit of the

diversification strategy gives BA irrefutable advantages. Gurau (2011)

summarized the potential benefits of diversification: first of all, the more

diversified the products are the more competitive the market is which in turn

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leads to a greater variety of offerings. Second of all, as we have already

brought to the attention the fact that a company diversifies its products not

only to make it visibly different from the ones of competitors, but to ascertain

that its products would be preferred by the customers to the offerings of the

closest competitors. Therefore, by trying to make products appeal to a wider

segment, companies are attempting to gain a stronger competitive advantage

hence, power over the market. Third of all, companies’ intentions to supply the

market with unique offerings result in development of innovations and

inventions, which in turn keeps both companies and markets afloat and

prevent their stagnation. The properly designed diversification strategy may

change the customers’ perceptions and likes in companies’ favor and benefit

(Hill, 2008).

The finding of this study suggested that BA could overcome and regain its

profitability (partly) through UK airlines market. According to Market Line

(2013), the UK airline industry is expected to be high growth by 2016 as UK

airline industry has generated revenues over $24.8 billion in FY 2012 and

among this revenues, CAG represents around 0.5% between 2007-2012

(Data Monitor, 2013). Hence, the British Airways could focus significantly in

UK market by increasing short haul flights between UK cities with Low cost

fares.

The global tourism industry has been in regaining position since 2008 as

economic recession has bad impact on tourism industry. However, tourism

industry has accelerating, international tourists up from 996 million in 2012

and it was grew by 4% in FY 2012. The Asia Pacific, South East Asia, Central

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Europe, North Africa are very good performer in terms of tourists arrivals.

Thus, BA could re-focus on its diversification in every sector, for instance the

company could increase more presence in Vietnam, Brazil, Far East, India,

and China.

However, as it was already pointed out above the success of diversification

depends on the BA’s capability to “match the firm’s capacity for creating

diversification to the attributes that customers value most” To achieve that, BA

must not only pay attention to the customers’ demands and requests, but also

adequately evaluate their own strengths and abilities. Therefore, in order to

outperform the rivals, BA has to combine both differentiation and cost

leadership strategies (Grant, 2010). In addition, both combination of cost

leadership and diversification may help BA to improve its profitability.

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