Strategic Choice and Analysis - Assignment Example

Running head: STRATEGY Strategic Choice and Analysis ___________ ________________________ ________________ Strategic Choice and Analysis Introduction This paper has the primary objective to look at the process of strategic choice and analysis with in organizations in relation to its competition. Organizations strategize vis a' vis competition in order to gain market power and share with the final objective of earning higher profits. We define various kinds of strategies with particular focus on cost leadership strategy and differentiation strategy. Basing on real life example of two competing companies within airline travel industry we try to locate evidence if any of these companies can simultaneously follow both cost leadership and differentiation strategies. If yes, then how and to what extent and if no, then why not. Process of Competitive Strategic Choice and Analysis Stephen Haines' Centre for Strategic Management has built a new strategic planning system based on systems thinking and calls it the 21st Century Yearly Strategic Management System and Cycle. This system moves beyond planning into implementation. It includes a Plan-to Plan phase and a Plan-to-Implement phase. The steps include team building and leadership skill building as part of the planning. It also includes a parallel process whereby all key stakeholders are involved based on the premise that 'People support what they help create'. This process starts with a Futuristic Environmental Scan and defines the ideal vision in terms of mission, values and end outcomes that the organization wishes to set for itself. Only after the statement of such Ideal Future a Current State assessment based on SWOT(Strengths, Weaknesses, Opportunities and Threats) is taken up to identify the gaps and make strategies to close the gap(s).As a result of their clients adopting this model it was found that clients began developing competitive edge and the organization was much clearer on what their competitive "positioning" in market place was and found themselves moving positively in that direction, to the delight of their customers(Haines,2004).Thus this process leans directly into the process of competitive strategy making as it includes environmental scan both-present and future and enables movement in the desired direction. However this system's parallel process is a very critical aspect and strategic management literature has a common view that good strategies grow out of ideas that have been floating around the firm, and initiatives that have been taken by all sorts of people in the firm. This resource must be drawn upon as frequently as required even in competitive strategy making. Thus a company's competitive strategy would concern primarily with its actions and plans for competing successfully - its specific and focused efforts to please clients, its offensive and defensive maneuvers to counter similar efforts of rivals, its responses to prevailing market conditions, and its initiatives to strengthen and improve its market position. Types of Competitive Strategies The generic competitive strategies and their standard objectives have been given in numerous strategic management literatures to include the following: (a) Overall Low-Cost Leadership Strategy: Its primary object is to find a sustainable cost advantage over rivals, using lower-cost edge as a basis either to under-price rivals and reap market share gains or earn higher profit margin by selling at going price. (b) Broad Differentiation Strategy: Its primary objective is to incorporate differentiating features that cause buyers to prefer firm's product or service over rival brands. Looking on the obverse side it implies that an organization must find ways to differentiate that create value for buyers and that such ways should not be amenable to easy copying and matching by rivals. An important differentiation strategy is not to spend more than the chargeable price premium, ever to achieve differentiation. This is in fact the theoretical crux of this article and clarifies the extent to which low cost leadership and broad/focused differentiation strategies can run hand in hand. (c) Focused Low-Cost Strategy: In this strategy it is recognized that a particular product or service of the firm has lower costs than competing products or services in a market niche. Objective is to derive advantage by driving cost further down till targeted percentage of the market niche is captured. (d) Focused Differentiation Strategy: In this strategy the firm works to address its differentiation attempts to satisfy the needs of the customers of a specific market niche. The objective is to make one's product so non standardized so as to establish a separate and distinct identity for this product. It implies that the developed product or service has features that a specific market niche customers desire but do not find in rival products or services. (e) Best-Cost Provider Strategy: The chief object under this strategy to exploit the cost advantage associated with a particular feature or set of features/attributes of the product or service sold by the firm. It implies that product or service is positioned as a low cost alternative for particular features (e.g. quality, service, safety, performance, uses etc). Depending upon the SWOT analysis the firm has the option to strategize on the above lines. Firm can adopt one or more of above strategies in requisite combinations. It's working plans and deployment of funds would be decided once the course of competitive strategy is decided. Cost Leadership versus Differentiation Prior to venturing into the specific study of two firms in a specific industry theoretical grounding would be appropriate on the planning and change elements through which such strategy is implemnted,enabling circumstances for success of chosen strategy and pitfalls in going over the board with a particular strategy. (a) Planning elements of Cost leadership strategy: The main elements considered by plans made under this essentially comprise of capture the economies of scale and at the same time avoiding scale diseconomies. Rationalize and reduce costs of key resource inputs. Map and complete linkages with other activities in the value chain. Raise capacity utilization to best rated levels. Probe opportunities to outsource, share opportunities with other firms including vertical and horizontal integrations. Beneficial mergers and acquisitions can have cost cutting as a stated objective. Reorient operations to reduce slack and flab. Assess how much advantageous would it be for the firm to turn first-mover of a cost cut.Successfull low cost firms treasure austerity but invest on requisite scales on cost-saving improvements. Cost reductions may increase operational effectiveness. This can lead to a "new best practice" in the industry, which eventually might be adopted by competitors (Porter, 2001).Cost reduction, however, is not necessarily a long-term strategy; it may barely be a tactic (Porter, 1996). (b) In contrast in a differentiation strategy main planning elements concentrate on unique and appealing attributes of products or services on offer. They can be unique taste, consumer use, design and performance, prestige, superior service, more for customer's money, spare parts availability, special features, quality of manufacture, state of the art technology, market leader image etc.Here strategic plans work to make the product or service non standardized and unique. In general, a unique selling proposition (USP) is essential to differentiate products from competitors (Boyd et al., 2002). In order to be successful, a USP should propose a benefit to the customer, it needs to be unique in a way that it cannot be easily replicated by competitors, and it has to be strong enough to attract new customers (Kotler, 2003). Thus, "differentiation is one of the most important strategic and tactical activities in which companies must constantly engage. It is not discretionary"(Trout &Rivkin, 2000). (c) Low-cost strategy works to best impact when the product is standardized or readily available from many suppliers and it faces vigorous price competition. Modes of further differentiation have virtually got exhausted. Buyers foresee low switching costs and use products essentially in similar fashions. Even bulk buyers with substantial spending budgets enable play of effective low cost strategies. Whereas a differentiation strategy works perfectly when there are many ways to differentiate a product that have value to ingratiate customers; technological turn over is rapid with new breeds of products and product features cropping up frequently and customer needs and uses are diverse. Paucity of competition following a similar category of differentiation also makes a firm's own differentiation strategy to succeed. (d) Pitfalls of following a low-cost strategy include loss in total revenue as an over aggression in cutting price may not pull up volume sufficiently to increase total revenues. Then low-cost strategies are easily imitated by rivals and a cost cutting firm may become insensitive to differentiation opportunities and in fact may make itself immobile to introduce cost boosting differentiations having already consciously cut prices severely. Then a cheap product may connote low quality. Any technological change may open up cost cutting avenues for rivals as well. Differentiation strategies may not work with desired impact if differentiation is ill placed and does not differentiate on product features that buyers perceive as lowering their cost or enhancing their well-being. On the converse differentiation may exceed the requirements of the buyers and loose price premium. In such instances buyers are likely to complain of excessive premium. A good rule can be derived as the gist of above discussion that a low-cost strategy can work well over a differentiation strategy when buyers are more or less satisfied with a standard product and do not see extra product attributes as worth paying additional premium. As Michael Hammer puts it, "MVA (More Value-Added) means that you give the customer more, perhaps far more, than you ever have before. It goes beyond simplifying your customers' interactions with you to delivering solutions to your customers' problems, of which your products and services in their native forms are but small pieces... You can visualize the principle of MVA as a ladder with your product at the bottom and the solution to your customer's problems at the top. The more help you provide your customers to fill that gap, the more value you add to them, which, of course, differentiates you from your competitors who are still scrambling around at the bottom of the ladder. Also, it is to your advantage to control as much of the ladder as you can - customers will be less likely to abandon you in favor of someone else, lower down the ladder, who offers less value. At the same time, your opportunity for margin and profit increase"(Hammer, 2001).MVA is the enhancement in product attributes as is being discussed above. Evidence of Cost Leadership and Differentiation in Airline Travel Industry The airline travel industry due primarily to the unique characteristics of services (i.e., intangibility, inseparability, lack of inventory, etc.) should be considered a model of a mature service sector. Such mature service markets are generally subject to dynamic strategic moves from various market participants quite unparalleled to traditional product or goods markets. To effectively mount competition in the industry, airline companies have experimented and tested various differentiation strategies to cover off and on board services, revenue yield techniques, operational efficiencies, and rationalizing labor force while maintaining labor relations. Yet, despite these Herculean attempts at differentiation most consumer studies, for instance those relating to major US airlines, have shown that consumer perception of airline travel in terms of service quality is more or less similar with little variation.(Rhoades and Waguespack, 2001). This has the implication that passengers see "switching costs" as meager between various airlines and can shift loyalty rather easily. A constituency of such customers can obviously make airline travel industry highly competitive and subject to intense price, particularly in slack demand seasons. This was the case particularly prior to the decade commencing 1990.Das and Reisel (1997) explain the over-reliance on price competition and cost reductions as natural developments of a mature industry. In the decade of 1990s there was a marked turn around in the airline travel industry. Prior to the commencement of the decade beginning the year 1990 airline travel was considered to be more of a "transportation" industry akin to some kind of 'air taxi' facility more concerned with filling standard passenger seats and ferrying them across than with providing them ' a traveling experience'. The environmental studies (current situational analysis) revealed that a substantially large niche/segment of new breed of affluent and professional air travelers had emerged which could be targeted for air travel products quite non-standardized and substantially differentiated and almost customized. These included investment bankers, corporation lawyers, entrepreneurs, real-estate developers and entertainment moguls of today's business and professional elites who tended to be in constant and paced motion with little time to spare. With passing days this niche was growing in size. In other words there was a large potential to create MVA for such niche and charge them appropriate premium to raise revenues and profits. Focused differentiation was the strategic need of the hour. Major global airlines were competing across countries for this meaty clientele. We take the example of two international airlines with minor and contrasting references to US airline(s) and examine their strategic initiatives in this period to address this segment of clientele. The two airlines chosen for the purpose are Singapore Airlines (SIA) and British Airways (BA). SIA was chosen because it is considered by those in the airline industry, travelers as well as its competitors, as one of the very best airlines in the world. It is reinforced by the fact that it has won numerous industry awards. It is arguably Singapore's and Asia's best-known airlines. Its beaming, lithe flight stewardess, outfitted in tight batik sarong kebaya marketed as the Singapore Girl, is a globally popular international service icon. It not only serves as an effective unique selling proposition for the airlines but has also earned substantial legacy differentiation leverage over similar icons of competing airlines.SIA assumed the new opportunity of niche differentiation efficiently and effectively as is explained below. BA was chosen as it has been an international airline that had emerged out of the near-bankruptcy financial mess in mid eighties to emerge as leading European carrier in 1990s. After its privatization in 1987, BA made globalization a major thrust. Into the 1990s, BA took up the difficult challenge of defining a competitive ideal vision based on futuristic environmental scan (FES) and measure its gap with current situation analysis (CSA) in order to maintain its momentum. During the course of CSA it had to take up cost cutting measures to improve profitability. As a result of these cost cutting measures by 1997, BA had been turned around the full circle, from an overall deficit of 544 million for 1983 to a pre-tax profit of 640 million. However it's FES clearly indicated that it had to go in for focused differentiation strategy to address new segment. Thus cost cutting had to go almost hand in hand while maintaining or increasing the value placed on customer service (i.e.MVA). The product/service differentiation visions and strategies of SIA and BA render interesting contrast in planning elements and offer comparative insights into product/service differentiation for the industry as a whole. SIA is strategically positioned in the premium segment of the global airline industry on service, quality and value market parameters. "The airline industry is, by its very nature, a service industry. In a free market, the success or failure of an individual airline is largely dictated by the quality of the service it provides" (Harvard Business School, 1989).Its differentiation strategy began with the immense popularity of The Singapore Girl marketing icon. This icon evoked an awareness of warm Asian hospitality and courtesy's backed this up with its very efficient service standards and already had a winning combination on hand. However it ventured into a fairly elaborate differentiation strategy to address the changed needs of new clientele. This differentiation took the form of: the introduction of gourmet cuisine in-flight dining with vastly improved servings for economy class passengers as well, hiring top of the line culinary experts' panel to train chefs and execute quality checks with a future vision to make its in-flight food an industry benchmark, multi million dollar cabin revamp with first-class cabins coming with an ambience of a mini-suite in a luxurious hotel and details covering the entire distance from custom-built seats to cashmere blankets, launch of its Frequent Flyer Programme(FFP), KrisFlyer, as the bulk of SIA clientele are non-Singaporeans specific trainings were organized for SIA crews to enable them to be conversant with and make announcements in the languages of the countries to which they flew, a valet and porter service for passengers on ground zero, special lounge for its passengers at Changi airport, only steps away from immigration, wider and more reclining seats for business class passengers on the house champagne for economy class passengers-an industry first, The above quoted were the few attributes touched upon in niche differentiation introduced by SIA and they were consciously built on the premise to exclude cost cutting strategy and focus on improving service so as to quench all clientele needs. This conscious service orientation via differentiation helped SIA to withstand and browbeat even US competition post deregulation of US airline industry's has shown that it competes not on the basis of costs and prices, but by differentiating itself on premium-quality service. The most important observation here, perhaps, would be that a legacy reputation of efficiency and cordiality enabled cushion for further product differentiation and enabled SIA to charge premium. An enormous spill over of the differentiation drive was a parallel process wherein the entire work force of SIA was involved in a shared vision and imbued with zest for excelling. This reinforced service quality as in any service industry man power is of paramount importance. Thus SIA had, more or less, frequent updates of its gaps with a future vision and maintained a focused differentiation strategy with The Singapore Girl being its long standing central piece of differentiation. In contrast BA had a chequered financial health and had to flip between one strategy to another and it had adopted cost cutting strategy consciously to regain financial health. It did bring in regular changes but some of them were revolutionary with unknown impact. Subsequently passenger/client feedback revealed that they were not quite appreciated by its constituency. In 1980s its advertisement campaigns to boost corporate image were received mildly and had to undergo revisions and relaunches. A noteworthy feature of BA's strategic trend has been that it preferred till end of 1980s to refreshes its brand image at time intervals longer than most top airlines. Only in 1990s did it consciously adopt the stance that a five year brand image stance will be way too long. Since then it has been constantly coming out with refreshes with varying themes. Differentiation has been a constant refrain in all such brand refreshes since. A few of the differentiation resorted to were: relaunching of its Club Europe service to include some of the best short-haul in -flight cuisine found anywhere in the world, adding nine new airport lounges throughout Europe, create the most ergonomic short-haul seat around, a telephone check-in service, a valet-- parking service, overhauling the audio and video channels to improve in-flight entertainment with interactive video services for specific aircrafts, BA stated that it was not competitive pressures that made it refresh its brand and begin differentiation but a keen desire to gain premium paying passengers. This strategy has paid off and BA is the leading European airline of today. Unlike SIA and BA, both of which, followed a proactive differentiation strategies (which contrasted well on timing, frequency, method and sustenance aspects) focused on satisfying customer needs with exhaustive quality of service so as to make 'flying an experience'; US airline continued under the belief that airline travel was standardized and customer did not appreciate much differentiation efforts. As stated above this made US markets competitive via price cuts. In order to cut prices it was necessary to prune costs. Thus cost cutting was major strategy of US airlines till early 1990s.The airline continued to work under an unrevised CSA and had a blurred FES and did not realize the gap. Their ideal vision was also ill-defined and simply focused on passengers that were looking to commute and earn miles under FFPs and other category of discounts. However starting late 1990s (1998) US airlines also realized the emerging niche and since then have been resorting to effective differentiation strategies to gain market. These strategies essentially differentiate airline services around the same planning elements as have been noted above in the case of SIA and BA. Conclusion There are, therefore, different strategies on how one can compete in the airline mass-market. One, can follow the traditional US approach, and presume the airline business as merely performing a function of transporting people at most economical price. This is cost cutting strategy. Another strategy to compete, as seen in examples of SIA and BA, is to go beyond the functionality and compete on the basis of providing an 'experience' of flying and make it as comfortable and pleasant as possible. The thrust of such a strategy is differentiation-focused or otherwise. Competence in serving people is obtained after enduring hard practice and therefore, it is hard for competitors to copy or match. Evidence indicates the two policies normally do not run in parallel fashion. Differentiation costs can escalate prices but if differentiated attributes are well received by the market then even such higher prices would be paid by a customer. The crux of the issue is to pin point customer needs and bring them in. References Haines Stephen.G, 2004, Reinventing Strategic Planning: A Researched Based 21st Century Success Framework, Retrieved March 20, 2006 from http://www.csmintl.com. Porter, E. M., 1996, What is Strategy, Harvard Business Review, November-December: 61-78. Porter, E. M., 2001, Strategy and the Internet, Harvard Business Review, March-April: 63-78. Boyd, H.W., O.C. Walker, J.W. Mullins and J-C Larreche, 2002, Marketing Management: A Strategic Decision-Making Approah,, New York: McGraw-Hill. Kotler, P., 2003, Marketing Management, 11th edition, Upper Saddle River, NJ: Pearson Education, LTD. Trout ,Jack & Rivkin, Steve, 2000,Differentiate or Die, Retrieved March 20, 2006 from http://www.1000ventures.com/business_guide/differentiation_strategy.html. Hammer, Michael, (2001), Agenda, Retrieved March 20, 2006 from http://www.1000ventures.com/business_guide/differentiation_strategy.html. Harvard Business School,(1989),Singapore Airlines (A), 9-687-022, Rev. 3/89. Read More