Corporate and Global Strategy - Qantas or Queensland and Northern Territory Airline Services - Case Study Example

Corporate and global strategy Qantas or Queensland and Northern Territory Airline Services, is the largest airline in Australia. It is also one of the oldest in the world. There is only one running airline in the world which is older than Qantas and that is KLM, a Dutch based airline. KLM started in 1919 where as Qantas started one year later in 1920 (Morrison & Winston,1995). Qantas was declared the second best airline for two consecutive years in 2005 and 2006. In the year 2007 it was at number five. Another feather in its cap is for having one of the largest fleet in the world with 218 planes. It is at number 17 for that (Skytrax, 2007). History Qantas was founded on 16th November 1920. We can divide its growth in 4 parts:- 1. before world war Before the world war, Qantas operated mainly as airmail service. The external trigger for this was the trend of airline industry. The internal trigger for this was their capabilities. Their infrastructure at that time allowed only this service. Although it had its limitation and they could not do much as a passenger service but it had its benefit also as it gave them time to build a foundation and develop its fleet and crew. This helped them in starting a successful passenger service and they finally formed Qantas Empire airways and bagged many contracts. 2. after world war After the world war, they had to stop their flights to Singapore due to the external trigger – the world war. But they continued their flights between Brisbane and few other routes as they had built up their fleet of Flying boats. This acted as the internal trigger. Due to this they could re-establish their international link in 1943 and started the longest overseas flight to Sri Lanka which was a benefit. They also realized that their fleet needed up-gradation which was a limitation and had to acquire Constellations. 3.  nationalization Nationalization was the effect of both internal and external triggers. World wide the airline industry was undergoing nationalization and the Australian government was getting a strong domestic hold by buying the shares of Qantas. As a benefit, they started many international flights. They also took over British Commonwealth Pacific Airlines. The Olympics XVI also acted as internal trigger to acquire seven Boeing 707 -138 aircrafts. They had major benefits in this period. 4. after privatization 1990’s were the years of privatization and it acted as an external trigger for Qantas also. The economies of Qantas worked as the internal trigger. It had some benefits like it acquired many airlines to become a large international operator. It also had some limitations as it had to face competition in the open market. Due to this it had quickly shift its strategies. It almost lost its market to Virgin Blue but tried to retain its share with Jetstar. Strategies Before assessing the extent of globalisation we need to decide the boundaries of the industry . It must consider the customer's viewpoint to study the relationship between industries and markets. We need to understand the factors that affect an industry. A framework which is developed from yip and coundouriotis (1991), presents four sets of industry drivers:- customers, cost, country and compensation. When these four factors are analysed, the potential for the industry for globalization can be found. Customer drivers have three components: Customer requirements Distribution Uniform marketing For marketing standardized global products it is important that consumer requirements converge to a common denominator. At the same time if the requirement for the local market differs significantly from the international market, then globalization of that product is difficult. Airlines industry has almost the same requirements at local and international level, thus the possibilities of globalization will be more. Distribution drivers are about the ‘pull’ or ‘push’ marketing strategies. The airline industry may have faced the ‘push’ situation in the early stages of the industry. In those days, people did not prefer air travel as it was considered more expensive and less safe than road and water transports. As worldwide acceptance of air travel increased, it slowly got converted to the ‘pull’ situation. Uniform marketing is about the possibility of uniformity in the marketing approach when expanding in different markets. It is much more applicable in case of consumables but an airline has a global acceptance and does not have to change its brand name or any other service to suit different nations. Cost drivers include: . new product development . scale economies . transportation costs New product development is important for all kinds of industry. But the cost of development is very high and that is why most of the companies go in for mergers and acquisitions. This helps them gain the infrastructural support and the know-how from the other company. When Qantas linked with Imperial Airways of Britain in 1931, it got the same advantages. The strategic alliance between QEA and Imperial Airways started in 1935 with QEA flying up to Singapore en route to London. In 1938, QEA started its service from Singapore to London replacing Imperial Airways. It was a profitable venture for QEA and their stronghold was punctuality. Their services were on time 94% of the times. According to a study, less than 50% of the joint ventures have agreed to have been successful (Trott, 2005). Mostly the reason for the failure of an alliance is lack of trust and understanding (Vyas et al, 1995). The process of partnership, alliance and acquisitions has been the part of Qantas’ corporate and global strategy. In 1954 it took over BCPA or British Commonwealth Pacific Airlines. Just like the new product development, the presence of scale economies helps firms to achieve high volume sales. This in turn helps spread total costs and reduce costs per unit. As soon as Qantas started flying international, it realised that these flights required bigger aircrafts for becoming economically feasible and started acquiring Short C Class Empire flying boats. It was easy to handle these boats as they required only one mooring buoy, fuelling facilities and terminal building. Transportation costs are responsible for helping or preventing any industry from becoming global. In airline industry, there has been rapid technological development and that has kept the viability going. In fact, it has worked in favour of the industry which can be seen not only in case of Qantas but all other airlines. Country drivers include: . trade policies . technical standards . cultural and regulatory barriers Trade policies can affect the cost of production or operation. After World War II the Australian government decided to buy the shares of Qantas and BOAC. Before nationalization the overseas services of QEA were limited to the British Empire. After nationalization it started its services to Tokyo and Manila. Very soon they started services to Hong Kong also. By 1952 they started services to Johannesberg also. Nationalization also helped them to improve their fleet. They already had Avro Lancastrian, they added Douglas DC-4s and Lockheed L.049 Constellations. If the technical standards converge, globalization is encour­aged, and if nationally specific requirements are encouraged, localization is encouraged. In case of airline industry, the technical standards are uniform, still any country having an edge in technology will gain. Regular up gradation of its fleet has been a regular feature with Qantas’s strategy. In 1956, it purchased Boeing 707, which was so far part of only the US fleet. Qantas also kept close watch on the worldwide growth of the industry. In 1960 there was substantial growth in air travel. Following it Qantas purchased bigger version of Boeing. Continuous up gradation of the fleet has been a strong feature in its strategy. By 1979, Qantas had become the only airline worldwide to have a fleet of only Boeing 707’s. This year it proved the vision of its management by introducing business class in its flights. Qantas was the first one in the world to have introduced this concept. Cultural and institutional barriers define the ways of marketing in different countries. In US the marketing style is very aggressive and firms can openly state the superiority of their products over their rivals but in UK it is not encouraged. The Australian government did not have such barriers but for Qantas, it was more of their service reputation and good fleet that kept them ahead of others. Competitive drivers have two sub-divisions: . competitive interdependence . new entry competition As the internationalization grows, there is an interlinking of competition. Depending on the circumstances, the company has to decide to expand further or to remain localized. If 1940’s were the years of nationalization, 1990’s were the years for privatization. Following the economic trends, Australian government sold its domestic airlines to Qantas. This made Qantas the national and international carrier of Australia. It also followed the path of privatization in 1993. It continued its path of alliances by co-founding Oneworld with American Airlines, Cathay Pacific, Canadian Airlines and British Airways in 1998. This alliance helped them to work in synergy and cut costs and offer much more to the customers than the capability of any one airline. Qantas gained another edge as its domestic competitor Ansett Australia closed down in September 2001. The only remaining competitor was Virgin Blue but it had only 10% of the market share. Soon after in October 2001, Virgin Blue announced major expansion. This affected Qantas and reduced its market share to 60% from the earlier 90%. Qantas also took quick decision to introduce low-cost airline wing called Jetstar. Although it did not push up its market share to the earlier 90% mark, it helped in retaining its 65% share. From 2004, it started operating Jetstar Asia Airways to capture the low cost Asian market. Qantas has 44.5% share in this carrier. Entry of new competitors also affects the process of globalization or localization. Qantas made a foray into New Zealand by holding shares in Air New Zealand. Later it took over the franchise of Ansett New Zealand. Its attempt to get a larger share in Air New Zealand could not materialize. As plan B it introduced Jetstar services to New Zealand to capture the market share. In 2006 Airline Partners Australia wanted to acquire all the shares of Qantas but after a long series of negotiations, the deal could not materialize. Qantas has been one of the most profitable airlines after its privatization in 1993. Today it owns Jetstar Airways, JetConnect and QantasLink wholly, has 49% stake in Air-Pacific of Fiji, 50% of Australian Air Express and Star Track Express. This is in accordance with Rugman’s concept of MNE’s (Rugman, 1996).. Most of the MNE’s expand by using other overseas subsidiary networks. It is welcomed by other countries as it helps their economy as well. It can help emergence of domestic MNEs of that country also. The most important gain for the other countries where MNEs expand is the gain of knowledge. Porter Diamond Model According to the Porter Diamond model, to get the competitive advantage four advanced factors need to be interlinked. These advanced factors are as follows :- 1. Firm Strategy, structure and Rivalry 2. Demand conditions 3. Related Supporting Industries 4. Factor conditions Qantas structured its fleet and corporate strategies according to its growth and looking at other competitors. Its management always took wise decisions and did not get swept away easily. When Boeing wanted to make them buy a model that was not economically feasible for them, they did not succumb under pressure and preferred to wait and get the right model. This they used firm strategy, structure and rivalry to their advantage. They also used the demand conditions in their favour. When the airline was used a mail service, Qantas did that. Later it introduced the Flying Doctor service and as the demand for travel grew, it got into that field. As it was nationalized, it got government’s support to develop related supporting industries. Porter Diamond Model presents the role of government as a challenger or catalyst. In context of Qantas nationalization helped to procure the specialized factors, thus giving them a competitive advantage. The composition of Australian population also created a demanding customer base as per the Porter Diamond Model. Direct competition compels the firms to increase productivity and innovation. Qantas kept pace with it by upgrading its fleet and also by introducing new flights. The main point of Porter’s Diamond model is that the key factors- skilled labour, capital and infrastructure for production, are not inherited but they are created. The founders of Qantas always took keen interest in the company’s policies and strategies. It had a very competent crew and the management recognized them. This gave them an edge and based on this they could successfully implement their growth plans. The Porter Diamond model factors are called the specialized factors. Unskilled labour and raw materials are accessible to any company where as acquiring the specialized factors require investment. This is what gives a competitive advantage to the firm. Since Qantas developed specialized factors since the very beginning in form of crew and fleet and other associated factors, it grew on the success path. Reference: Directory: world Airlines, Flight International. , 2007-04-03, pp. 101-102. Diamond Model – Porter on Nations, http://www.valuebasedmanagement.net/methods_porter_diamond_model.html Qantas Homepage, http://www.qantas.com.au/info/about/history/details16 Qantas annual reports, http://www.qantas.com.au/info/about/investors/annualReports Rugman, A. M.,1996, The Theory of Multinational Enterprises ,Cheltenham: Edward Elgar . Skytrax, 'The World Airline Awards', at http://www.worldairlineawards.com/Awards_2007/AirlineYear-2007.htm, accessed December 19, 2007. Trott, P, 2005, Innovation Management and New Product Development, third edition, Pearson Education Limited. Vyas, NM, Shelbum WL, Rogers DC, 1995, An Analysis of strategic alliances: forms functions and framework, Journal of Business and Industrial marketing. Bibiliography: Sheth, J.,Allvine, F.C., Uslay C., Dixit, A., 2007, Deregulation and competition, lessons from the airline industry. Morrison, S.A. & Winston C., 1995, The evolution of the Airline Industry. Roll, M., 2006, Asian Brand Strategy. Eldad, B.Y., 2005, The Evolution of the US Airline Industry, Theory, Strategy and Policy, Series: studies in industrial organizations , Vol. 25 Emmott, B., 2003, 20/21 vision: twentieth-century lessons for the twenty-first century Frith, K. T., and Mueller, B., 2003, Advertising and societies: global issues Lindsey, B., 2002 Against the dead hand: the uncertain struggle for global capitalism. Cavanagh, J., 2002, International Forum on Globalization, and Alternatives Task Force. Alternatives to economic globalization: a better world is possible Moran, T. H., 2002, Beyond sweatshops: foreign direct investment and globalization in developing countries Hansson T., Ringbeck , J. Franke, M., 2003, Flight for survival: a new business model for the airline industry. Baldwin, R. E. and Winters, L. A., 2004, Challenges to globalization analyzing the economics Appendices External triggers to the internationalisation process Globalisation Localisation Market drivers Market drivers . Customer requirements: homogeneous . Customer requirements: heterogeneous customer needs worldwide, enabling the customer needs, with strong local industry to standardise products to all preferences. major markets. . Distribution: distribution channels are . Distribution: existence of a global specific to a local market. distribution channel operating at a . Marketing: key elements of the marketing worldwide level. mix need to managed on a local basis . Marketing: homogeneous nature of reflecting different brand names, market marketing mix allows common approach position, etc. and brand names to be used to serve all major markets. Cost drivers Cost drivers . New product development: significant . New product development: insignificant research and development costs to be research and development costs. recouped. . Scale economies: any potential . Scale economies: economies of scale are economies of scale can be achieved highly significant and require volume through servicing the local market. Small- output. scale producers are not at a significant . Transport costs: high value to weight cost disadvantage when compared to ratio means that transport costs do not large rivals. discourage centralised production on a . Transport costs: low value to weight ratio worldwide basis. results in transport costs requiring demand to be met from locally based production units. Country drivers Country drivers . Trade policies: insignificant national trade . Trade policies: nationalistic trade policies barriers. prevent imported products being able to . Technical standards: international compete with locally produced goods. technical standards accepted in all major . Technical standards: divergence of markets. national standards prevent product . Cultural and institutional norms: these are standardisation. not an impediment to global marketing. . Cultural and institutional norms: these vary country by country. Competitive drivers Competitive drivers . Competitive interdependence: principal . Competitive interdependence: product- markets are strongly interlinked. Firms market in one country does not affect the need to operate in all major markets. firm's compe!itive stance in another. . Entry of new competitors: international . Entry of new competitors: entry has not competitors have entered the local taken place. market. Summary Summary Industry has globalised, requiring firms to Industry remains localised, with locally operate on a worldwide basis in order to focused firms being able to compete on reduce costs and improve their competitive equal terms with companies with basis. international scope and scale. Source:- http://pacific.commerce.ubc.ca/ruckman/diamond.gif The four cs or industry drivers Summary of industry drivers for the consumer electronics industry over the next five years High Med I Low Industry drivers Low Med I High Customer drivers Customer requirements Distribution I Marketing Cost drivers New product development Scale economies Transport costs Country drivers Trade policies Technical standards Cultural/regulatory barriers Competitive drivers Competitive interdependence Entry of new competitors Read More