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05/02/2012

Economics of Business Strategy


 

Economics of Business Strategy

 

Introduction

Cathay Pacific is one of the most well known airline company in the world. It provides different services to different people in the world (Cathay Pacific Airline, 2010). The company has over 100 planes each operating well and maintained well by the most able staff. Its airport facilities offer the best service experience to clients. The company makes sure that the clients enjoy their experience in riding the planes and using their facilities. The company passes by almost 90 different destinations (Cathay Pacific Airline, 2010). By doing this, the company provides service to the clients as well as takes advantage of such situation to promote its products to more people in more parts of the world.
Basically, companies in the aviation industry in Hong Kong were identified changing and developing their history, culture and the way they do their business. In addition, the aviation industry in Hong Kong is experiencing fast market growth. The services offered by aviation companies in the industry are in actual fact transposable and interchangeable. It has also been recognized that the services offered by the airline businesses in Hong Kong like Cathay Pacific Airways Limited is a product to a chief division of its stakeholders. Furthermore, it also shows that there are substantial numbers of large competitors that dictate the industry. With this regard, this paper discusses and reviews the business practices of Cathay Pacific Airways Limited through significant strategic business models like the value chain analysis and Porter's five forces.

Porters' Five Forces Model

The most governing strategic management concept in modern era is known as the strategies model (Fredrickson 1991). Porter (1998) asserts that the force of rivalry in business is not by means of chance or unluckiness. To a certain extent, competition or rivalry in any business industry is derived in its basic economic configuration and goes well away from the behavior of present rivals. The condition of rivalry in an industry varies on five basic competitive forces. The following discussion illustrates the five basic competitive forces in Cathay Pacific Limited in Hong Kong.

Figure 1 – Porters’ Five Forces Model[1]

 
In accordance to this, this part of the paper was divided into five categories (Porter's Five Forces, 2006): (i) competitive rivalry intensity, (ii) status of new entrants, (iii) customers bargaining power, (iv) suppliers bargaining power, and (v) threat of substitute products.
The intensity of competitive rivalry is keen - This part of the paper analyzes and assesses the intensity of competitive rivalry of Cathay Pacific Airways Limited. Basically, in order for Cathay Pacific Airways Limited to build up an approach that can give greater feat, they must achieve and sustain competitive advantage and it has been recommended to create some amount of competitive gain.
Actually, the assessment of the airline industry attractiveness is based on Porter's 5 forces model. In our case, Cathay Pacific Airways Limited spot in the airline industry in Hong Kong is not in good status since there are some wobble situation they are facing. As reported by CAPA New Airline of the Year (2007), Cathay Pacific Airways Limited shows its desire to establish autonomous growth through the development of their services. Basically, stiff competition triggered heavy losses of Cathay Pacific Airways Limited Airline (CAPA New Airline of the Year, 2007).
Even though this is happening to Cathay Pacific Airways Limited Airline, the Hong Kong travel industry has still been presenting stable signs of development and improvement in great number of years now (Travel Daily News Website 2010). This constant development can be accredited to the transformations in tactical plans executed quite a lot of years in the past and is still being further controlled up to now. Essentially, the serious component of the approach was that Hong Kong travel industry launched looking at things from the views of the clients and the patrons.
Based on the discussion, it shows that the intensity of competitive rivalry is keen and it affects the business operation of the company. As justified, the company still dominates the Airline business but due to the escalating prices of fuels, Cathay Pacific Airways Limited Airline ceased their operation ( Lee, 2005) . This means that even though Cathay Pacific Airways Limited Airline is still on top of the competition among other low-cost Airline company, the company is not exempted to the impact of global inflation. The company enjoys its competitive position in the region and still trying to sustain its competitive advantage among its rivals. With this regard, the company still needs to manage and sustain the quality of their services in order to gain trust to their customers.
The threat of new entrants is not strong- The threat of new entrants could be considered as serious because the lack of distribution channels of major competitors will damage the good reputation of companies and organizations as well as their products and services (Thompson, & Strickland, 2003).
Firstly, in the situation of Cathay Pacific Airways Limited Airlines, the threat of new entrants is not strong (CAPA New Airline of the Year, 2007). Because of the existing high price pressures of fuels in Airline Industry (CAPA New Airline of the Year, 2007), the new entrants especially the new low-cost airline will have difficulties in surviving in current business market. As revealed by CAPA New Airline of the Year (2007), even though Cathay Pacific Airways Limited is considered as a leading long-haul low-cost airline they are still suffering because of global inflation rate and high and escalating business costs.
Secondly, a national air-taxi system is force airline industry's hand. In the words, financing billions of dollars in flight and ground equipment during the 1990s present a tremendous challenge to the airline industry. Airline industry returns on investment generally have been poor. Otherwise, with a notable exception ( Mok, 1998 ) 12 airline cash flows over the long term have been inadequate to meet capital requirements. Therefore, the ratio of debt to equity for many airline company owners has increased impact to negative levels on their credit worthiness. This has not only limited access by airlines industry to external, but also led to larger option fees and progress payment requirements from the airline industry-as much as 20% of the aircraft price in a three-to four years period before delivery.
At the same time, deregulation has increased the demands on management for marketing skills, strategic planning, cost control, policy to guarantee, and competition with other firms. Investor who is should be concerned with financial condition of the airlines. The financial condition of the industry directly affects the company behavior in short run and ultimately, like their structure, performance in long term.
For short term, the airline company might resort to less than compensatory fares in order to generate sufficient cash to cover their fixed cost to meet the above-mentioned financing. This may threaten that the profitability and survival for carriers in long term. Benefit from low fares in short run, carriers to survive, fares must be raised eventually to keep capital in the industry. Furthermore, a small number of carriers need to complete with each more. At all the large commercial airports, they provide much stronger competitive pressure to hold down costs and fares competing in less extensive networks than a large number of carriers.
The bargaining power of customers is not strong - This refers to the impact that customers have on a producing industry (`Porter's Five Forces' 2006). In Cathay Pacific Airways Limited's consumers, buyer power is strong, such that this could provide Cathay Pacific Airways Limited Airline's rivals with a strong and efficient business. In Cathay Pacific Airways Limited environment, the buyer power is the impact that customers have on the industry. Travelers are who fly for trends in jet airplane sales. A talk with air-taxi model would be attractive for a reason beyond mere convenience was a routine first stop for understanding the small plan system.
Airline businesses have a long history--a history rich in diversity, international scope, and, above all, continuous change and adaptation. These competitive changes have forced adaptations, and in general have improved the level and efficiency of the services offered by Cathay Pacific Airways Limited Airlines to clients, thereby increasing service quality ( The Associates, 2007) . Coupled with these and extensive advertising of airline companies, the customers have become informed and becoming more demanding. They have required that airline companies meet their very specific individual needs, therefore showing that clients to this industry have shaped what it is right now. This means, on an overall note, that customers have a high influence on the workings of the airline industry, as they have the ability to affect it.
The bargaining power of suppliers is not strong - With respect to the current stance of global economy, everyone is suffering from high inflation rate. In the situation of Cathay Pacific Airways Limited, the power of their suppliers is also strong. The increase in costs of maintenance of airplanes and costs of fuels has significant impact to the operation of Cathay Pacific Airways Limited (CAPA New Airline of the Year, 2007). In addition, because of this, Cathay Pacific Airways Limited has to adjust their prices in order to cope up with the current changes in the business environment. Basically, the proceeding presentation below illustrates that high fuel prices are leading airlines a faster-growing source of gas emissions, more eco-friendly cars. For years, airlines have countered pressure from environmentalists, airlines are working hard to develop fuels for their jets.
Basically, the bargaining power of suppliers in Cathay Pacific Airways Limited Airline is also high. This is evident as when the said airline ceased their operation in 2007 (CAPA New Airline of the Year, 2007). The fuel supplies and airplane maintenance materials use in business operation is crucial for the company. And currently, due to global inflation and the increase of prices of these supplies, this becomes a treat in business operation of Cathay Pacific Airways Limited.
The threat of substitute is weak - Actually, Cathay Pacific Airways Limited was one of the best airline businesses in Hong Kong (The Associates, 2007). Their reputation helps the company lead over their competitors. In reviewing the airline market of Hong Kong, it shows that the substitute for airline services is weak. Actually, the threat is weak due to varying reasons. Actually, aviation is certainly static, like new aircraft sales, fares prices, revenue passenger miles, passengers benefit, flying hours, on-time performance and number of departure all stability than ship and other transportation.
With respect to the efforts of the company in maintaining the quality of their services, the treat of substitute is weak. Actually, substitutes give high influence to the company since substitutes they can make a company lose the clients it has. But in the case Cathay Pacific Airways Limited Airlines, they make sure that the substitutes won't give them too much problem. They do this by proving that the services they offer are of best quality and are better than substitutes. They also prove that their services are better against others by comparing and contrasting it with substitutes so that clients can know the difference. The company also offer services superior than substitutes so that they can attract more clients.
Value Chain
One of the best ways to assess and evaluate the activities of a certain business leading to competitive advantage was through the creation of generic value chain. According to Campbell et al, (2002), value chain refers to the framework that was used in reviewing the company's strengths and weaknesses. The result of this analysis was normally leading to the improve performance of their business operation. According to Porter (1998), the activities of a certain business that are considered part of "Value Chain", could also be subdivided into primary activities and support activities.
In the case of Cathay Pacific, the company has a supplier (e.g. oil fuel, aircraft parts, etc.) that offers needs in order for them to generate quality services ( The Associates, 2007). With the intention of boosting the organization's competitiveness, Cathay Pacific considers three core competencies contained in their value chain or operation. These consist of utilization of information technology, productivity gains, and decrease of environmental impact. Furthermore, Cathay Pacific also considers the potential of the information technology to hold all value chains advantageously and thoroughly ( The Associates, 2007). And finally, it presents stress to its suppliers by valuing them during seminars and other edifying efforts.
Conclusion
As revealed in the findings, currently Cathay Pacific Airways Limited Airline is suffering from possible downfall because of stiff competition, escalating high price pressures of fuels and changing behavior of their customers. The strategies of Cathay Pacific Airways Limited Airline focus more on the organization and way in of information rather the creation of extraneous airline services. Hence, Cathay Pacific Airways Limited Airline has developed a unique set of guiding principles - simplicity, cost-efficiency and effectiveness. Total commitment to these principles makes the airline services of Cathay Pacific Airways Limited Airline very user-friendly to its customers.

Alternatively, Cathay Pacific Airways Limited Airline' strategies in the airline industry changed for the better at the start of the new millennium and began pursuing airline service differentiation. True enough, the differentiated airline services of Cathay Pacific Airways Limited Airline were able to satisfy the needs of customers through a sustainable competitive advantage. This also justified that the bargaining power of their customer is high while the treat of their substitute and new entrant is low because of their extensive efforts in maintaining the quality of their services. Furthermore, this permitted Cathay Pacific Airways Limited Airline to desensitize the prices of their airline services and as a replacement for focused on the values that produced not only a reasonably higher price but also a better margin since these things could help to avoid business demise.

References

Campbell, D., Evans, N. & Stonehouse, G. (2002). Strategic Management for Travel and Tourism. UK: Butterworth-Heinemann.

CAPA New Airline of the Year (2007). Cathay Pacific Airways Limited Airlines, accessed 02 June 2010, from <http://www.centreforaviation.com/aviation/images/stories/conferences/2007/Outlook/Gallery/9.html>

Cathay Pacific Airline (2010). Cathay Pacific Airline Website. accessed 02 June 2010, from <http://www.ozflights.co.uk/aircx.htm>

Fredrickson, J. (ed.) (1991). Perspectives on Strategic Management, Harper Business, New York.

Lee, H. (2005). A Study on the Competition Relationship between Airlines and Travel Agents – The case of Cathay Pacific Airways, accessed 02 June 2010, from,<http://etd.lib.nsysu.edu.tw/ETD-db/ETD-search/view_etd?URN=etd-0619106-150625>

Mok, J. (1998). Asia-Pacific Airborne: Six Futuristic Mega-Airports, Including Hong Kong International, Will Handle Unprecedented Growth in Air Travel in the Asia-Pacific Region. Forum for Applied Research and Public Policy. vol 13. no 3. pp. 84

Porter, M. (1998). Competitive Strategy: Techniques for Analysing Industries and Competitors, The Free Press, New York.

Porter’s Five Forces (2006). Quick MBA, accessed 02 June 2010, from <http://www.quickmba.com/strategy/porter.shtml>.

The Associates, (2007). Hong Kong: Cathay Pacific Profit Rises 55%, accessed 02 June 2010, from <http://www.nytimes.com/2007/08/09/business/worldbusiness/09fobriefsCATHAYPACIFI_BRF.html?ex=1344312000&en=0fd098172639021&ei=5088&partner=rssnyt&emc=rss>.

Thompson, A.A. & Strickland, A.J. (2003). Strategic Management Concepts and Cases. 13th Edition: McGraw Hill/Irwin: New York.

Travel Daily News Website (2010). accessed 02 June 2010, from <http://www.traveldailynews.com>.


 

[1] Adapted from Porter (1998).

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