1.

INTRODUCTION Strategic management is the process used by organisations to determine

mission, vision, goals, objectives, and possible timelines to achieve these noted goals and objectives. A working definition of Strategic Management is as follows, All that is necessary to position the firm in a way that will ensure its long term survival in a competitive environment. For the assignment at hand, the major international airline that would be used is British Airways. As a member of the one-world alliance, British Airways offers a network of over six hundred (600) destinations. British Airways has met the intended requirements for this assignment with group turnover at 2,313 million at the end of September 2006. As stated by Johnson, Scholes and Whittington, strategic management, includes understanding the strategic position of an organisation, strategic choices for the future and turning strategy into action. (Johnson, Scholes and Whittington 2006, p.16) British Airways strategic position is concerned with their ever changing environmental position. Within British Airways strategic position, they are able to identify opportunities and threats and consider their strengths and weaknesses. Strategic choices at British Airways are primary to their success and possible improvement as it underlines bases for future growth at different business levels. Placing these strategies into action not only require that British Airways do such, it often requires structuring and change. In order to better illustrate British Airways strategic position, a PEST analysis is shown in Appendix One (I).

2.0

STRATEGIC OPTIONS The question in this paper, requests a strategic review of British Airways,

this review must first address three principal strategic options that British Airways can pursue for its future growth and development.

2.1

STRATEGIC OPTION 1 (ONE) British Airways need to identify opportunities for themselves in

chosen areas and approach markets that would give them a strong competitive position. This is where the author identifies the first strategic option to be implemented, that is, Short Haul market coverage.

2.2

STRATEGIC OPTION TWO (2) In pursuit of technological and efficiency dominance, which would

decrease flight down time, and which would give them a significant competitive edge in their industry, the second strategic option is introduced, that being, Information Technology and Maintenance Differentiation.

2.3

STRATEGIC OPTION THREE (3) British Airways can also go for a better quality of service, such as

long flight distances that cost less, an approach that combines a low cost advantage with British Airways regular long distance flights. This allows identification of the third strategic option, British Airways going Low Cost Long Haul.

3.0

STRATEGY DEVELOPMENT

3.1

STRATEGIC OPTION 1 (ONE) (Short Haul Market Coverage) British airways having a significant influential and impressionable

brand name and brand image should move into a predominantly short haul market. One such market is the Asian short haul market where they would be able to use their brand name, image and financial strength to compete effectively and obtain significant measures of market share. This strategic option lies in the differentiation without price premium rating of the strategy clock as developed by Cliff Bowman (Bowman and Faulkner 1996). British Airways could gain benefits here as this strategic option would enable them to yield market share benefits with their customers yielding perceived added value. This perceived added value coming from British Airways level of performance, safety all for a reasonable price as stated in the works of the strategy clock. The customers in this new 3

market perceive added value primarily because of the British Airways brand. The direction that British Airways would have to take for Short Haul Market Coverage, under the Ansoff Marketing Strategies, developed by Peter. H. Ansoff would be, Market Development. This directive would pose a significant level of risk of going into. But again, British Airways brand and financial backing would ensure that their pursuit of additional market segments and geographical spread is successful. British Airways core competencies would, lead to the development of core products, as stated by Prahalad and Hamel (1995). For implementation and development of British Airways into the Short Haul Market in Asia, an acquisition would be best suited as British Airways, which has the financial backing, would be able to easily absorb a much smaller airline operating in the market. This would allow rapid entry into the market, beneficial to customers as lower prices may be a result and finally, reduces the level of competition in the market arena.

3.2

STRATEGIC OPTION TWO (2) (Information Technology and Maintenance Differentiation) Thru research it is seen that there are requirements for

improvements in the I.T and maintenance of most airlines. It is plausible for British Airways to develop an I.T. and Maintenance division that would operate as a separate entity from British Airways. This option when placed 4

against the strategy clock developed by Cliff Bowman, shows that it lies under differentiation with price premium. The I.T. and Maintenance entity would be sourced by primarily airlines and other organisations. There would be a perceived added value, because the level of efficiency and performance would be sufficient to meet the organisation requirements of other airlines. Therefore this perceived added value would be adequate enough to bear the price premium that would be associated with it. The direction to be taken by this option under Ansoff Marketing Strategies would be Product Development, this strategy holds some downsides for the subsidiary operating under British Airways as they would have to make accommodations for high costs, failure rates and acceptability and appreciation by their niche market. The subsidiary body would need to focus their strengths to over come disadvantages by aiming to follow the changing needs of their clientele. In order for them to be stable amongst their competitors, they would need to constantly develop and acquire new competencies. For implementation, it is best seen that the choice method to use here is Internal Development. This method would allow for effective and essential implementation that would help absorb some of the high costs that would have been brought about through product development. It also would allow for the subsidiary to choose its location, and it would also carry no inappropriate cultural history. However even though costs would be spread, so that it may look the cheapest to implement, overall costs are 5

higher. But this cost factor would not be a negative factor because of the parent company, British Airways.

3.3

STRATEGIC OPTION THREE (3) (Low Cost Long Haul) The strategic option of British Airways going Low Cost Long Haul is

represented in the Strategy Clock under the arm of a Hybrid Strategy, as developed by Cliff Bowman (Bowman and Faulkner 1996). British Airways would have a low cost base, which is one of the primary attributes of Low Cost Long Haul. This option would also make it easier to simultaneously achieve differentiation and a lower price than competitors. They may be able to achieve a lower price because of their strong financial base out of they being a previously only legacy carrier. There would also be clarity on the core competencies, to help in reduction of costs on other activities. The direction that this option would follow is one of Product Development under the Ansoff Generic Strategies. This would allow for British Airways to go further into aiming at settling the ever changing needs of customers. Customers needs such as the need to go to their same destinations or further for less. There are a few downsides that British Airways may experience, such as risk of failure in this new arena, some initial new costs, and also to ensure that they are sustainable and have continuous development.

With British Airways going Low Cost Long Haul, the best suited method of implementation and development would be Mergers with companies that practice either one of the two, Low Cost or Long Haul. This would facilitate rapid entry into the new market. By acquiring smaller companies, they would lower the risk of direct competition and therefore lower costs that would have been incurred. A possible shortfall of mergers and acquisitions is that it would be a long time before significant financial benefits are realised.

4.0

SUITABILITY TESTING According to Johnson, Scholes, Whittington (2006), suitability, requires a

broad assessment of the extent to which new strategies would fit with the future trends and changes in the environment exploit the strategic capability of the organisation and meet the expectations of the stakeholders. (Exploring Corporate Strategy 2006, p.358)

4.1

STRATEGIC OPTION 1 (ONE) (Short Haul Market Coverage) The option of going into Short Haul Markets is viable however it

does not tend to be supported or consistent with the organisations mission and objectives. Therefore as part of the Suitability criteria measurement for this option, it is noted that British Airways would need to make alterations to objectives and mission statement to accommodate this solution. This option needs to also be matched with British Airways resource capability and the environment in which they operate so as to determine viability. Their strategic fit in their industry will show that they are capable of going into new saturated markets with vast opportunities for geographic spread and gaining a foothold in these new market segments. The Short Haul Market Coverage solution is capable of, after having gained significant market share in the new market and placing a foothold within the market, gaining significant profits in this new market segment. They would be capable of exploiting current strengths, products 8

and to enhance on existing competencies to guarantee the potential for significant profit margins. Assumptions of Short Haul Market Coverage with regard to the Life Cycle show where this solution might be in the future. Going into Short Haul Market Coverage would give purchasers / customers the selectivity to purchase from a wider scope within the market. However with British Airways brand and its strong brand image and financial strengths, they can be identified in the Short Haul Market Coverage as fitting into the Shakeout stage of the life cycle for that market. Because there would be many competitors and British Airways would be able to incur cost cuts because of their financial strength, therefore shaking out the weakest competitors and attaining increases in market share. This strategic option would be exploiting core competencies primarily because it will be competing in a new market with a high level of existing customers. Therefore the value chain analysis identifies where the support activities would be critical in gaining value for money. These are done however in close relation to the primary activities, the most important for this option being marketing and sales.

4.2

STRATEGIC OPTION TWO (2) (Information Technology and Maintenance Differentiation) This option is not in line with identified Mission and Objective

statements, the resource and competency base and the environment make this option seem to be a viable one. Its effect on the environment is that it would be able to exploit based on acquired knowledge, the needs of customers. The capability is that it should exploit research and development into the option base and the potential benefits are that it should yield good returns at medium risk by exploiting organisational strengths. There is the likelihood also of initial costs being to high for them to absorb. This option holds potential for profit because of the need for airlines to outsource efficient and competent I.T and Maintenance companies. Development of this allows for a first in the environment. This also holds that there are significant costs that are going to be taken up and also high failure risk levels. This option would lie in the growth stage of the lifecycle model, with other airline companies taking trials of the services offered. It would be easy for share market here as the fight or competition for market share would be very low. This method may also be capable of adding value for money that may be invested into it through outbound logistics and technology development via the value chain.

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4.3

STRATEGIC OPTION THREE (3) (Low Cost Long Haul) This option of British Airways going Low Cost Long Haul is not

consistent with any existing mission or objective statement. Therefore revamping of the mission and objective statements would be necessary. This option matched up to the strategic fit of the organisation shows that resources are ample to move into this area. This option, targeting the needs of customers would be beneficial as it would tend to absorb any huge cost spreads but in the long term, generate a profit potential. Under the life cycle model, this option doesnt seem viable because it will be in the developmental stage with high risk factors and high cost factors, even though at this stage of the life cycle there would be little or no competition. There are also certain problems that may be identified along the value chain in marketing and sales because with the implementation of this option via mergers and acquisitions there would be growth returns issues and also the issue of culture clashes. In the value chain, it may not add value for money but because of the low costs involved, exploitation of core competencies may be a big issue. With all these cost issues, it is not seen that this would enhance the business profile, that is, lead to sound financial performance.

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5.0

SELECTION OF STRATEGIC OPTION Based on the suitability testing criteria that were previously carried out, the

most suitable option is Short Haul Market Coverage. Whilst not discrediting the other options available, it was seen that this option posed the most essential benefits for the solution proposed. Utilising British Airways band name and image, coupled with their strong financial background would lead them into favourable market coverage and lead them to achieve sustainable market share. By utilising a merger and acquisition development implementation plan, they also would be able to acquire smaller companies thus reducing competition and increasing available market shares. The other solutions were extremely influential, but posed certain disadvantages when they were passed through suitability testing. Some of the disadvantages which lead to the disqualification of the other options are, lack of sustainable returns on investment, risk on investment, cultural and possible political clashes, competition, and inability to gain market share as an advantage.

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6.0

FEASIBILITY OF SHORT HAUL MARKET COVERAGE According to Johnson, Scholes and Whittington, Feasibility is concerned

with whether an organisation has the resources and competences to deliver a strategy. A number of approaches can be used to understand feasibility. (Exploring Corporate Strategy 2006, p.371) There are for this option certain constraints that need to be addressed to determine its feasibility. These are internal constraints, external constraints and commitments from managers and employees. The resource deployment of all the resources and competences needed for the strategy needs to be identified.

6.1

RESOURCE COMPETENCY - PHYSICAL RESOURCES These Physical Resources include Machinery, Buildings,

Production Capacity etc and the usefulness of these resources will be based upon factors such as age, condition, location etc. The BCG Matrix (See Appendix Two II) has four categories which are applicable to British Airways in identifying their physical resource competencies. These categories are: Dogs - Dogs have low market share and a low growth rate and thus neither generate nor consume a large amount of cash. Question marks - Question marks are growing rapidly and thus consume large amounts of cash, but because they have low market shares they do not generate much cash. The result is a large net cash comsumption. 13

Stars - Stars generate large amounts of cash because of their strong relative market share, but also consume large amounts of cash because of their high growth rate; therefore the cash in each direction approximately nets out. Cash cows - As leaders in a mature market, cash cows exhibit a return on assets that is greater than the market growth rate, and thus generate more cash than they consume. Cash cows provide the cash required to turn question marks into market leaders, to cover the administrative costs of the company, to fund research and development, to service the corporate debt, and to pay dividends to shareholders.
Source: Authors 2007

Based on the above, due to British Airways growth and their place in the mature stage of the life cycle and the fact that they provide returns on assets and they generate sufficient amounts of cash to cover their administrative costs, they are classified as a Cash Cow.

To better understand the activities through which British Airways develop their competitive advantage and create shareholder value, it is useful to separate their business system into a series of value-generating activities referred to as the value chain (See Appendix Three III)

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The value chain model is a useful analysis tool for thier core competencies and the activities in which it can pursue a competitive advantage in the new Short Haul Market as follows: Cost advantage: by better understanding costs and squeezing them out of the value-adding activities. Differentiation: by focusing on those activities associated with core competencies and capabilities in order to perform them better than do competitors.

6.2

RESOURCE COMPETENCY - HUMAN RESOURCE Culture Web This is important as understanding culture is not straightforward.

Assumptions that make up the paradigm are usually evident only in the way people behave day to day. The basic idea behind the Culture Web is an understanding of the taken for granted assumptions or paradigm and the behaviours of the organisations culture.

Routines and Rituals Rituals in British airways had to deal with providing a service to their customers and being of service to them and their needs whilst on the flight. Outside of dealing with service quality to 15

customers, individual rituals and routines identified as drinking form a lucky cup, labeling office equipment and working from where they are most comfortable, hot-desking. These routines and rituals provide a sense of stability. Stories Most of the stories in British Airways deal with developments in safe terrorist free travel, especially post 9-11. The heroes in this respects are those that seek to address these issues to make customers feel safer, most of the time, politicians are seen as villainous as they are the ones trying to re-assure the traveling public that there is absolutely no threat. Symbols Symbols in British Airways reflected issues of the various institutions within their operations. For example, uniforms

representing a level of purpose or authority, that is, from the pilot to maintenance to cleaning. Status symbols such as locker room areas and dining areas have significant impact on Symbols. Power Structures The power structure in British Airways is fragmented between issues of who makes what decisions that directly affect costs, who has seniority over the other and who is more qualified than the other. Control Systems British Airways is affected most here with respect to departure times as theses times are usually longer now rather than before 16

9-11. Control over angry and upset customers are often addressed by senior management but most of the times, it is not enough to comfort passengers. Organisational Structures The organisational structure of British Airways has been streamlined for the Middle East and Pakistan regions. It has been switched to a more streamlined approach type structure.
Source: Authors 2007

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7.0

ACCEPTABILITY OF SHORT HAUL MARKET COVERAGE According to Johnson, Scholes and Whittington, Acceptability is

concerned with the expected performance outcomes of a strategy. These can be three broad types: return, risk and stakeholder reactions. (Exploring Corporate Strategy 2006, p.361) Returns, Risk and Shareholder reactions are all related to financial backing and performance of British Airways. So therefore the acceptability analysis for British Airways going into Short Haul Market Coverage is going to be done with their financial backing and strengths. BA operates an international scheduled airline route networks, comprising 148 destinations in 75 countries. During the fiscal year ended March 31, 2006 (fiscal 2006), it carried more than 35 million passengers on its services. During fiscal 2006, of the Company's total revenue, 80% was generated from passenger traffic, 6% from cargo and 14% from other activities (including fuel surcharges).

Management Effectiveness Company Industry

Sector
8.27 5.63 10.73 7.40 19.85 14.38

S&P 500
8.29 6.56 12.36 10.09 20.23 17.91

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Source: http://www.investor.reuters.wallst.com/stocks/Ratios.asp?ticker=BAB#Dividends

Efficiency
Revenue/Employee (TTM) Net Income/Employee (TTM) Receivable Turnover (TTM) Inventory Turnover (TTM) Asset Turnover (TTM)

Company Industry
350,298 20,826 12.03 67.70 0.73 299,160 29,043 28.01 42.47 0.91

Sector
286,332 29,943 13.13 39.82 1.16

S&P 500
916,015 117,472 10.45 12.41 0.98

Source: http://www.investor.reuters.wallst.com/stocks/Ratios.asp?ticker=BAB#Dividends

(The diagram below shows industry benchmarks of top 10 international airlines measured by market capitalization.) BRITISH AVERAGE Capital Gearing Current Ratio Acid Test Fixed Asset Turnover Altmans Z score 42.7% 1.5 0.8 1.4 2.9 BEST 31.4% 2.6 2.4 2.1 4.6 WORST 68.4% 0.5 0.4 0.2 0.7 AIRWAYS AIRLINE 62.92% 1.07 1.04 0.98 1.9

Source: A.R.U Lecturer Notes dated 15/11/06

From the above, a profitability analyses can be done utilising forecasting the return on capital employed, payback period and discounted cash flow.

8.0

IMPLEMENTATION ISSUES IN SHORT HAUL MARKET COVERAGE

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There

would be implementation

issues such as

landing rights,

communications between countries. Landing slots are allocated to Airlines by an airport and these may be some of the implementation issues that may be faced with this strategic approach. Cultural differences would play a huge role in implementation, especially with countries and cultures of different races, and language. Also with this approach being identified in the shakeout stage of the lifecycle, caution would have to be taken with regard to mergers, acquisitions, and also security issues, with regard to code sharing stock issues and insider trading issues.

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