Malaysia Airlines System Berhad - Porters Five Forces Model - Case Study Example

Case Study Analysis: Malaysia Airlines (Name) (Institution) (Date) Introduction The airline industry is an industry that constantly faces the challenge of managing the increasing growth in demand for air transport, while at the same time, minimizing risks to ensure safety (Cento, 2008). The industry is highly speculative since airlines have to consider changes in the world economy before embarking on such crucial decisions as investments and planning. In addition, this industry is top among those that are highly regulated and subject to constant scrutiny, thus, thus exerting more pressure on participants to operate efficiently. In most countries, most airlines operating within this industry are owned by the respective governments. However, the Asian market, in particular, has seen a surge in the number of privately owned airlines, in recent years. Malaysia Airlines System Berhad is a company operating in an environment that is both competitive and rapidly changing. In order to compete efficiently within the Asian market, Malaysia Airlines has to embrace innovation, but only after weighing both the physical and financial risks involved. The company, established in 1947, has weathered many financial crises and stiff competition from other participants within the airline industry, to emerge into one of the most recognized airlines in the Asian market (Hephaestus Books, 2011). Increased fuel costs, poor market conditions and increased competition from airlines, such as Air Asia, are just a handful of the challenges faced by Malaysia Airlines and others operating within the airline industry. Competition among airlines is to be expected in such a service industry as the airline industry. However, the emergence of Air Asia poses a serious threat to the operations of Malaysia Airlines (Lim, 2012). The rival airline has a competitive advantage over the latter given that it offers air travel at prices that resonate well with those on a budget. The low prices offered by Air Asia are only possible because the company undertakes certain actions that ensure efficiency, while at the same time, minimizing costs. Such actions include the utilization of the internet to aid in ticketing and doing away with accommodation expenses for its employees while on the job. Countering competition from budget airlines Over the years, there has been an increase in the level of competition within the airline industry. With the onset, of globalization and increased liberalization within this industry, more and more airlines have ventured into the Asian market in a bid to benefit from the increasing demand for air transportation (Jarvis, 2002). However, in order to survive in this cut-throat industry, airlines have to come up with strategies that will endear them to their intended clients, to gain an edge over their rivals. With the emergence of airlines, such as Air Asia, which offer low-budget prices, participants within the airline industry have to draw up new prices. This they have to do considering the expenses sustained by the company and its goal of profit maximization. Therefore, to respond to such threats that result from competition from budget airlines, companies need to draw up their own unique budgets or form alliances within the industry. Other possible solutions can be for the airlines to diversify into other businesses that relate to air transport. This way, they can make sure that their client base is increased (Rosander, 2006). In addition to the above strategies, airlines can research into other actions that are not necessarily related to air fares, to avoid triggering a price war. Although, beneficial to clients, price wars have been known to do more harm than good, thereby resulting in massive losses. Therefore, airlines can choose maybe to focus on the quality of services they offer to clients as opposed to the price. This solution is also significant when a company wants to maintain its brand equity. Porter’s Five Forces Model This model, developed by Michael Porter, is a significant tool used to analyze the business strategy of a company. The model seeks to establish “the overall attractiveness of an industry, competitive intensity and environment” (Charles W. L. Hill, 2007). On analysis of the situation within the industry, it is evident that the level of economic growth is rather low, and most airlines are likely to experience low profitability. However, further scrutiny using Porter’s Five Forces model reveals that some airlines are, in a position, to attain higher profitability levels and even surpass the average levels within the airline industry. I. Threat of new competition Certain factors, such as unexploited markets and increased demand for air transport, may attract new companies into the industry. For instance, within the Asian market, countries such as China and India offer a wide client base, which is likely to attract airlines. In fact, Air Asia recognized that the Asian market was not fully exploited and, thereby, ventured into this market. However, as more and more airlines enter the market or industry, the level of profitability will decrease for all the participants, unless entry is barred. II. Threat of substitute products Most of the business handled by Airlines, such as Malaysia Airlines, comes from leisure travellers and those flying for business. With increased technological advancements, most transactions can occur without the need to meet face to face. The accessibility of alternative services or products poses a serious threat to operators within the airline industry. III. Bargaining power of buyers This is the ability of customers to affect the pricing of products or services. This is especially common in markets where the buyers are few, while the service providers are several. The buyers have a significant impact on the pricing decisions since they can purchase a high volume of the products or services on offer. IV. Bargaining power of suppliers This refers to the ability of suppliers to wield power in markets where few substitutes exist or products on offer are unique. In the airline industry, luxury aircrafts such as the Airbus and other services are utilized to earn more profits. The airlines can increase their prices depending on the distinctiveness of their products or absence of alternatives. V. Intensity of competitive rivalry This refers to the rivalry that exists among such airlines as Malaysia Airlines and Air Asia, both operating within the same market. Air Asia’s strategy of offering air fares to its clients at exceedingly reduced rates increases the pressure for Malaysia Airlines to do the same. In order to counter the strategy of its rival, Malaysia Airlines has to carry out market segmentation and come up with strategies that appeal to each of the segments. Macro environment analysis Most industries have market structures that are either monopolistic or perfectly competitive. However, the airline industry does not fit the assumptions of either and is categorized as oligopolistic. Under this market structure, there are only a few airlines operating within the industry; there is strategic interaction and the market shares change with time. Unlike in a monopoly, airlines do not have much control over product prices as they are mutually interdependent. Thus, one airline cannot make decisions regarding price or sales without putting into consideration the pricing decisions of its competitors. This is illustrated as follows. Q = Q (P, P1, …, PN) Where P is the price of the airline, while (P1, …, PN) represents the prices of N competitors. The global financial crisis saw a serious decline in the number of people using air transport and almost resulted in several airlines going bankrupt (Gordon Betcherman, 2001). With the entry of low-cost carriers and poor market conditions, airlines have been compelled to reduce their air fares so as to compete. In an oligopolistic market structure, price leadership refers to a situation where an airline announces a change in their prices, causing others within the industry to make similar concessions. Macro economic challenges faced by Malaysia Airways can be best analyzed using PESTEL analysis. These are outlined below. I. Political/Legal The appointment of Idris Jala by the government as the CEO of Malaysia Airlines saw the airline avoid bankruptcy and achieve success. One condition set by the CEO was autonomy from the government and freedom from political interference (Mokhtar, 2008). In Malaysia, the government obligates airlines to participate in corporate social responsibility by offering extremely reduced fares on locals. In most cases, these result in losses for the airlines. The airline industry also faces tight regulations and scrutiny, thus curtailing their business freedom (Sinha, 2001). II. Economic According to Nanto (2010), the global financial crisis almost resulted into the airline going bankrupt. Increasing costs of fuel, labour and decreasing demand for air travel are some of the economic challenges that continue to plague Malaysia Airlines and other participants within the industry. III. Social Increased rate of terrorism and other security threats only serve to discourage people from using air travel. When people perceive airlines to be unsafe, the demand for air travel significantly reduces, resulting in massive losses for airlines. In addition, if airlines do not embrace environmentally friendly business practices, they are likely to lose customers who are environmentally conscious. IV. Technological Increased advancements in technology have been both advantageous and disadvantageous to the airline industry. Although, airlines can reduce costs through online marketing tools, they can also lose business. A huge majority of the profits earned by airlines come from business flyers. However, through technology, businesses can conduct meetings and transactions online without the necessity of travel. V. Environmental Under the leadership of Idris Jala, the airline is dedicated to operating in an eco-friendly manner, so as to reduce costs. The airline is engaged in several programs aiming at minimizing and finding solutions to environmental problems such as the Fuel Emission and Conservation Program. Airline industry analysis The airline industry is an industry characterized by heavy regulation and constant scrutiny. It is extremely competitive and challenging when it comes to management. The level of competitiveness has had a serious effect on the pricing strategies of participants, and the entry of new budget airlines only serve to threaten the profitability and market share of existing airlines. A relationship exists between the situation in the economy and the airline industry. Changes in the economy often result in changes within the airline industry. For instance, in times of growth, airlines will experience more customers travelling for leisure unlike in recessionary periods. This shows that, within this industry, the demand is cyclical and inclined to seasonal peaks (Larry Dwyer, 2010). Drastic changes in the demand for air travel and/or changes in the costs of labour will significantly affect the profitability of airlines. Recommendations Competition within the airline industry ensures that customers are presented, with numerous options, to avoid switching from one airline to another. As a result, airlines need to review their business strategies so as to compete with other airlines. The following courses of action are recommended. Online reservations or e-ticketing should be encouraged to minimize the costs associated with travel agents and other commissions. Use of the online marketing tool also ensures that Malaysia Airlines can provide low air fares to its customers. In addition to this, offering discounts on tickets and promo fares can boost the number of customers using the airline at little or no extra costs. In order to compete efficiently with a budget airline as Air Asia, Malaysia Airline should form alliances with other airlines, to avoid suffering losses associated with price wars. Developing an alliance will boost the company’s brand, while subsequently providing more choices to clients. Furthermore, the airline should look into offering loyalty reward programs for loyal customers who have been flying with the airline for a given period. Conclusion Despite the numerous challenges faced by Malaysia Airlines, the company has managed to maintain a record of profitability and is among the most recognized airlines operating within the Asian market. The company’s CEO has provided sound and effective leadership, which has steered the company away from bankruptcy, and towards sustainability. The company has achieved success by expanding operations across six continents, with hundreds of different locations. References Cento, A., 2008. The Airline Industry: Challenges in the 21st Century. London: Springer. Charles W. L. Hill, G. R. J., 2007. Strategic Management: An Integrated Approach. 8th ed. Connecticut: Cengage Learning. Gordon Betcherman, R. I., 2001. East Asian Labor Markets and the Economic Crisis: Impacts, Responses & Lessons. Washington D.C.: World Bank Publications. Hephaestus Books, 2011. Articles on Airlines of Malaysia. Richardson, Texas: Hephaestus Books. Jarvis, D. S. L., 2002. International Business Risk: A Handbook for the Asia-Pacific Region. Cambridge: Cambridge University Press. Larry Dwyer, P. F. W. D., 2010. Tourism Economics and Policy. Bristol: Channel View Publications. Lim, W. M., 2012. Air Asia: Penetrating Into the South African Airline Industry. Munich: GRIN Verlag. Mokhtar, K. S., 2008. Privatising Malaysia airlines: a policy transfer approach. Kuala Lumpur: Penerbit Universiti Kebangsaan Malaysia. Nanto, D. K., 2010. Global Financial Crisis: Analysis and Policy Implications. Darby, Pennsylvania: DIANE Publishing. Rosander, Y. H. A. J., 2006. A New Organizational Model for Airlines. [Online] Available at: http://www.mckinseyquarterly.com/A_new_organizational_model_for_airlines_1700 [Accessed 8 October 2012]. Sinha, D., 2001. Deregulation and liberalisation of the airline industry: Asia, Europe, North America and Oceania. London: Ashgate. Sook Ching Wong, J. K. S. K. F. C., 2005. Malaysian "bail Outs"?: Capital Controls, Restructuring, and Recovery. Singapore: NUS Press. APPENDICES APPENDIX A: MACRO ECONOMIC ANALYSIS Factor Issue Analysis Effect on industry Political/Legal Government interference on operations of the airline. Negative. Reduced air fares on local flights result in losses for airlines. Privatization Positive. More autonomy on operations. Government bailouts Positive. Saves many airlines from going bankrupt. Promotion of tourism and hospitality industry by the Ministry of Tourism Positive. Increasing the number of customers. Promoting Kuala Lumpur International Airport as a regional air hub Positive. Increased security threats. Negative. Customers are afraid of travelling by air. Overall: Positive Economic Global financial crisis Negative. Airlines facing bankruptcy. Increased demand for air travel Positive. More customers. Increased costs of labour Negative. Increased costs of operation. Increased costs of fuel Negative. Overall: Negative Social High population Positive. Increased demand for air travel. Increased terrorism threats Negative. People are afraid of travelling by air. Increased demand for corporate social responsibility Positive. Opportunity for airlines to market themselves to communities. Increased airborne diseases e.g. Swine flu Negative. Safety of air travel is compromised. More professionals travelling overseas for business. Positive. Increased passenger count. Overall: Positive Technological Online reservations/E-ticketing. Positive. Reduced costs of operations Web assistance. Positive. Customer satisfaction and improved quality. Technological business solutions. Negative. Reduced need for travelling. Overall: Positive Environmental Increased call for environment friendly business operations. Negative. Initial costs are high. Carbon trading. Positive. Alternative revenue source. Cheaper fuel alternatives. Positives. Reduced costs of operations. Overall: Positive INTERNAL ANALYSIS: SWOT ANALYSIS ITEMS ISSUES ANALYSIS Strength Government support Malaysia Airlines is a partially private company and listed as one of the Government Linked Companies. Brand recognition The airline is recognized and accredited by Skytrax and IATA and is also ISO certified. Customer care The airline has won numerous awards for its customer care capabilities. Business Strategy Both BTP 1&2 are evidence of the strong business strategies that the company possesses. Leadership The CEO, Idris Jala, has succeeded into turning the company into a profitable business, away from bankruptcy. Weaknesses High costs of operations Overstaffing, low yield, route inefficiencies, increased fuel costs. Opportunities Loyalty reward programs These ensure the airline maintains existing customers and attract new ones. Expansion of product line Expand operations to other countries. Online marketing Reduce the costs of operations. Threats Budget airlines The airline industry is oligopolistic and reduction of fares by competitors forces the airline to do so too. Economic climate Worsening economic conditions affect the demand for air travel. APPENDIX B: INDUSTRY ANALYSIS ITEMS ISSUE ANALYSIS IMPACT RANKING Threat of new competition Unexploited markets and increased demand for air transport attract new entrants into the market High Although the products in this industry are mutually dependent, there is need for distinction to compete. Low The airline industry requires a high capital investment for an airline to be competitively viable Medium The airline industry is subject to tight regulations and most airlines in the Asian market are either entirely or partially owned by the government. Medium Threat of substitute products Online business solutions and web assistance offer alternatives to doing business, thus threatening the number of clients High Quality of substitutes significantly influences the choices of the buyer Medium Bargaining power of buyers Since the products offered within this industry are mutually dependent, buyers hold a lot of power and are spoilt for choice. Medium Bargaining power of suppliers Luxury services give airlines more power to affect pricing decisions based on the uniqueness of their products Medium Airlines can switch to other routes in cases where the profits do not match operational costs Medium Intensity of industry rivalry Budget air fares offered by rivals threaten the overall profitability of airlines Medium Reduced ticket prices offered by low-cost carriers can lead to price wars given that the airline industry is characterized by an oligopolistic market structure. High The global financial crisis affects the rate at which the industry grows. High Read More