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  • 1.   Strategic Management in Services OrganizationsBouhad IlyasMBA Hospitality management – November 2012
  • 2. Table  of  Contents   Executive  summary  ...................................................................................................................  3   Introduction   .................................................................................................................................  4   Corporate  structure:  Corporation,  firms  &  organization  .............................................  5   The  corporation  .......................................................................................................................................  5   The  firm  and  the  business  system  ...................................................................................................  5   The  organization  ......................................................................................................................................  7   Strategic  scope  of  the  firm  ......................................................................................................  8   The  product  scope   ...................................................................................................................................  8   The  market  scope  ....................................................................................................................................  8   The  geographical  scope  ........................................................................................................................  9   Competence  scope  ................................................................................................................................  10   Business  system  and  strategic  costs  ..................................................................................  10   The  sunk  costs  ........................................................................................................................................  10   Learning  curves  ......................................................................................................................................  10   Economies  of  scale  ................................................................................................................................  11   Economies  of  scope  ..............................................................................................................................  11   Complexity  costs  ....................................................................................................................................  11   Transaction  costs  ..................................................................................................................................  12   Industry  analysis:  Porter   .......................................................................................................  12   Bargaining  power  to  those:  ...............................................................................................................  13   Potential  entrants  ............................................................................................................................................  13   Buyers  ...................................................................................................................................................................  13   Substitutes   ...........................................................................................................................................................  13   Suppliers  ..............................................................................................................................................................  13   Industry  competitors  ......................................................................................................................................  13   Market  dynamic   ........................................................................................................................  15   Market  definition  .....................................................................................................................  15   Risk  of  Myopia  ........................................................................................................................................  15   Risk  of  presbytia  ....................................................................................................................................  16   Market  phases  .........................................................................................................................................  16   Market  differenciation  or  segmentation  .....................................................................................  16   Market  strategies  .....................................................................................................................  17   Organization  ..............................................................................................................................  18   Structure  ...................................................................................................................................................  18   Culture   ........................................................................................................................................................  18   Profile  of  individuals  ............................................................................................................................  19   Leadership  models   ................................................................................................................................  19   Value  creation  ...........................................................................................................................  20                      
  • 3. Executive  summary     The aim of this strategic case study of British Airways is to apply all the seenchapters during the lessons of strategic management in services organizations. This document contains some information from both the annual report ofBritish Airways and its websites. The CEO is Mr. Keith Williams, and has been amain Board director for the last six years. He is also aBoard member of International Airlines Group, the parentcompany of British Airways. Prior to joining BritishAirways he worked for a range of major corporationsincluding Reckitt and Coleman, Apple Computer Inc andBoots. He has extensive financial experience including adetailed knowledge of business planning, capital projects,project finance, and has been involved in many recentissues such as pensions and industrial relations. To well develop British Airways and compete its competitors, here are somerecommendations in order to compete the other airlines. • Cancel unprofitable flights or join these flights with other airlines and not to use large Boings during short-distance flights • Improve their marketing programs to attract a lot of new passengers. • Reduce salaries and bonuses of its top-managers   The airline industry is one that continuously faces change due to newtechnology, customers needs, and other types of change. British Airways needs tocontinue to revaluate their current strategy by looking at the re-energizing stage.                    
  • 4. Introduction         The strategy of British Airways is to grow their presence in key global citiesby signing a lot of partnerships with other airlines, and delivering an outstandingservice for customers at every touch point, in flight and on the ground.British Airways in brief:Creation of British Airways: By the 1970s, the United Kingdoms air serviceprimarily consisted of two government-owned airlines. British Overseas AirwaysCorp. operated long-haul international routes and British European Airways absorbedindependent U.K. airlines that flew short-haul European routes in the 1950s. The bothairlines came under the new governmental organization, the British Airways Board in1972, two years later, they merged all their operations and rebranded under BritishAirways."The Worlds Favorite Airline": After the merger, the airline introduced thesupersonic jet Concorde in 1976, winning prestige and trans-Atlantic businesscustomers. The airline trimmed its route structure and adopted the slogan, "TheWorlds Favorite Airline."Privatization and Acquisitions: In 1987, the British government floated BritishAirlines on the London Stock Exchange. The airline moved to acquire competitorssuch as British Caledonian in 1987 and Dan-Air in 1992.                        
  • 5. Corporate  structure:  Corporation,  firms    organization      The  corporation   International Airlines Group is one of the worlds largest airline groups with398 aircraft flying to 200 destinations and carrying more than 50 million passengerseach year. It is the third largest group in Europe and the sixth largest in the world,based on revenue. Formed in January 2011, IAG is the parent company of British Airways,Iberia and BMI. It is a Spanish registered company with shares traded on the LondonStock Exchange and Spanish Stock Exchanges. The corporate head office for IAG isin London. IAG combines the leading airlines in the United Kingdom and Spain, enablingthem to enhance their presence in the aviation market while retaining their individualbrands and current operations. The airlines customers benefit from a larger combinednetwork for both passengers and cargo and a greater ability to invest in new productsand services through improved financial robustness. The airline industry is moving gradually towards consolidation though someregulatory restrictions still prevail. IAGs mission is to play its full role in futureindustry consolidation both on a regional and global scale.The  firm  and  the  business  system   The activities of British Airways are centered in four areas, they invest inbetter quality in general, better schedules and better onboard service. • Workplace – ensuring that they provide sustainable employment for current employees and become the employer of choice for future employees. • Marketplace – working with suppliers and customers to build a more sustainable business. • Environment – making sure they minimize their impact on the environment, including their contribution to climate change, air quality, noise and waste.  
  • 6.                                    
  • 7. The  organization     In 2010, Iberia and British Airways was merged to create “InternationalAirlines Group”. British Airways’ has four subsidiaries, Open Skies, which purchased for $108million the French airline L’avion. Currently, it is based in France and operates aroute between Paris and the airports of New York. The second subsidiary is City Flyer, which is a subsidiary airline that operatesa network of European flights from London City airport, and then British AirwaysWorld Cargo, the world’s twelfth-largest cargo airline, and finally, the franchise SunAir of Scandinavia, based in Denmark, a regional scheduled airline operating afranchise service in British Airways colors.        
  • 8. Strategic  scope  of  the  firm      The  product  scope     British Airways has a large product scope, because it proposes many servicesand products, like offering a range of destinations over the world, booking flights,catering equipment, aircraft control system, hospitality, giving information. Moreoverit has a large organization; the money comes from a large economical scope. Forexample, you can book hotels or rent car for whole holidays online on their website. To talk about the main product “The passenger transport”, a flight fromLondon to New-York for the next holidays in the economy class costs approximately1050€. But in the first class, the price increases quickly to reach 12000€.   The difference of price is explaining by the various services proposed onboard, and the facility obtained in the airport before the access to airplane, such asonline check-in, flat beds and arrival lounges with showers, fast track security whentravelling from a Londoner airport (Heathrow and Gatwick) or from New York JohnF. Kennedy. British Airways has three transportation industry segments: Air Services Travel and Hospitality Freight, Logistics and RailPassenger Airlines Distribution Public TransportAirports Hotels and Gaming Freight RailCargo Airlines Cruise OceanAir Services Suppliers Vehicle Rental TruckingThe  market  scope         British Airways targets people seeking comfort. Its goal is to deliver superiorservice to its clients willing paying bit more. For its large market scope, British Airways has multiple segments; it meansthat it sells the same service “A flight on the same airplane for all passengers” atdifferent prices.
  • 9. The four classes proposed on board by British Airways are, the economyclass, which includes online check-in, a baggage allowance, allocated seats, snacks ormeals. The premium economy class for the long-haul flights, this class is availablefor long-haul flights. It offers more privacy, space and comfort in a smaller, secludedcabin. The business class, with many services on board, likes extra space to work orrelax, and fully flat beds on all long-haul flights. The final class is the first class,which includes a high quality of services. The client is assisted during all journey’ssteps, before take off of the plane, on board, and after landing. For example, on theground, the customers can have an exclusive check-in and access to the lounge in theairports of London or New York. These three last classes are designed for corporates, and the economy class isfor leisure.The  geographical  scope         The British Airways’ main base is at London’s Heathrow airport in Terminal5, which holds almost all the operating staff, equipment, and aircrafts. But it also hasa major presence at Gatwick airport and at one time operated a significant hub atManchester airport. British Airways would like to grow its presence in key global cities worldwideto provide the best global connectivity for their customers. That’s why it operates inseveral destinations thanks to its partners. For example, before the merge with theSpanish carrier Iberia, neither British Airways did operate in South America, norIberia did operate the North American ground. In 1999, British Airways moved to make itself competitive by introducing theOne World alliance, which contains eleven airlines. Currently, the network extendsto some 570 destinations in 135 countries, and they share marketing costs and airportfacilities.     Where British Airways flies?    
  • 10. Competence  scope         The main competencies that differ from the competitors are: • Service on broad: British Airways has always had an above average reputation for its in-flight service. • Image of brand: The airline is the largest airline in the UK based on fleet size, international flights, international destinations, and its sole access to Heathrow terminal 5. • Large international field: Access to more than 300 destinations. British Airways did its major operations by outsourcing. Like in distributionwhere there is an agreement between Amadeus, the famous reservation system, whichguarantees full content access users worldwide. Moreover, British Airways is in contract with WNS, a global business processoutsourcing company, which is based in India. They deliver a range of airlineoperations, including customer relations, fares and Passenger Name Record “PNR”servicing requests, passenger and cargo revenue accounting, finance and accounting,research and analytics, revenue and yield management and Human Resources sharedservices.Business  system  and  strategic  costs      The  sunk  costs         In the British Airways’ case, the advertisement, the purchase of aircrafts, evena crash of an aircraft is a sunk cost, because it’s an irrecoverable investment. Theinvestments made already in the current planes and airport facilities that cant berecovered, instead the airline needs to keep flying and transporting passengers andgoods until they pay for the sunk cost and turn a profit. British Airways plans to invest more than £5 billion in products and servicesby 2015 is underway and supports the launch in September of the first major brandcampaign for ten years.  Learning  curves       British Airways has done many operations in the past “merges, purchase ofstakes from other airlines, investments, alliances… “. Which help it to improve itsperformance to decrease both time and cost of delivery’s process of the final productor service. Thanks to the several experiences with other airlines such as purchase ofstakes, creation of “One World” in 1998, merger in 2010 with Iberia, alliance withAmerican Airlines; British Airways has got a significant learning curve from thesefacts to compete the other airlines to operate a large destinations to serve and satisfytheir customers, and earn a large market share.
  • 11. Economies  of  scale     Economies of scale occur when a firm grows larger its long run average costsfall. Within the air transport industry in particular, the  biggest  is  the  the  transport  of  passengers and there are significant economies of scale, the merger of BritishAirways and Iberia shows economies of scale very nicely. Thanks to this merger, both airlines will retain their brands and heritage whileachieving significant synergies as a combined force and they can effectively halvetheir costs, by reducing costs through staff, or by removing some unprofitabledestinations. To achieve enhanced scale to compete with other major airlines. BritishAirways needs bigger network to complete with larger rivals Virgin, Emirates, AirFrance-KLM and Deutsche Lufthansa. The new company will combine BritishAirways’ strong position in Europe-to-North America traffic with Iberia’s LatinAmerican business.Economies  of  scope   The  critical  activity  in  British  Airways  for  which  there  is  a  market  scope  strategy, is how British Airways reacted when their customers have would gainaccess to new destinations, of which half of them are in Latin America. While Iberia’scustomers would gain to new destinations across the British Airways network.Additionally, the deal benefits from planned alliance with American Airlines.Complexity  costs           British Airways’ headquarter is based in Heathrow airport, but there arecomplexity costs with suppliers abroad, especially from Asia, like “Call BA” acustomer service in India. Another complex cost example, is the IT travel system including passengerservice systems and web booking used by British Airways, which has changed afterthe merge with Iberia to gather all the bookings’ data. They minimize complexity costs, by reducing outsourcing, and building itsnetwork, for its reservation system, which is Amadeus; Iberia uses the same tool tomake the interaction easy. As a result, they cut by 56 million pounds, the coastspending on IT system only.
  • 12.                                             The  cabin  crew  dress-­‐up  with  Indian  clothes,  a  way  to  counter  the  complexity  coast  Transaction  costs       According to the annual report of British Airways in 2010, the transactioncosts directly associated with the acquisition is two million pounds. They reduce its transaction costs by squeezing the global distribution systemsin Great Britain. An example of transaction costs is the fact that British Airways paysfor American Express and other credit cards commissions, and for American Express,they obligate British Airways to use its credit cards with corporate’s clients.Industry  analysis:  Porter           Power of buyers: Threats of new entrance: Long haul destinations. Competitive environment.   Availability of flights and seats are High regulatory requirement.   limited. High cost requirement.   Prices change according to   demand.     Competitive rivalry:   BA caters for both long and short haul flights.   Small difference between BA and its   competitors in term of pricing and offer.   The short haul market is more   fragmented with many small players.       Threats of substitutes:   There are few direct closed Power of suppliers:   substitutes. Two aircrafts manufacturers Short haul flights: Eurostar+ (Boeing Airbus). BA restricted by sole suppliers ferry. of fuel to the airport. Long haul flights: no notable substitutes.
  • 13. Bargaining  power  to  those:      Potential  entrants     The level of the threat of new entrants is very high, and it’s very difficult tolaunch a brand in the air transport industry, because of the legal entry barriers sush asthe competitive environment, high capital cost requirments.  Buyers         For the long haul distance, the buyers’ bargaining power is medium becausecutomers do not have lot of choice, moreover the availabality of flights or seats islimited, it means that customers’ bargaining power depends of the productivity of theairline.   However, when customers fly with British Airways they expect a high qualityservice, and thanks to yield management, the airline changes the price according todemand of customers during all year. Finally, the increase of Internet usage hasamplified awarness and interactions of customers; actually, the majority of onlineconsumers use price-comparisons sites before their purchase.        Substitutes         The bargain power of substitutes is very low, there are few direct closedsubstitutes on the short haul flights, Eurostar or a ferry are the only substitutes,however, there is no one notable for the long haul flights.  Suppliers     The main suppliers of British Airways and globally airlines industry areAirbus and Boeing, indicating their high bargaining power, the both are the mainaircraft manufacturers in the world, and they have high interest and big impact on thecompany and vice-versa. British Airways has only one fuel supplier meaning it alsohas power over the decisions made by British Airways. Moreover, there are also fuel companies,which have a high bargainig power againstBritish Airways, while the oil prices stillfluctuate, and then the exchange currencyaffects directly British Airways.    Industry  competitors     Actually, the airline industry containts three main alliances with a large rangeof airlines worldwide, that growth competition between airlines, The increase of oilprices and the financial crisis have pushed the airlines to combine with each other tosolve these issues, which has raised the competition in the whole industry, For
  • 14. example BMI and Brussels Airlines. British Airways is facing a strong short-term market competition from smallerbusinesses such as Easy Jet or Ryanair; the following figure shows the rapid growthof these airlines in term of revenues, passengers and profit before tax. But therestricted number of airlines and high fares charged mean lower internationalcompetition for British Airways. However, competition remains high and intensivewithin Europe. Furthermore, British Airways caters for long haul and short haulflight; within long haul there is little differentiation with the competitors in terms ofpricing and service offering.
  • 15. Market  dynamic    Market  definition     The market of British Airways is the transport business, an area where it sellsits products thanks to its network that contains travel agencies, tour operators. Transport is a need for a large range of people, even if the crisis settled inmany sectors, people will also continue seeking a way to travel. As British Airways is part of the transport sector worldwide with a highquality services, the group has to offer different solutions on every situations tooptimize they offer and so their turnover.                      Risk  of  Myopia   The risks of myopia in British Airways are the threats from the low-costcarriers because their market shares still grow and consumers change their behaviors;moreover, they can be also substitutes on the future. And British Airways can lose itscustomers if it focuses only on shareholders, or in high quality services on the firstclasses, forgetting the economy classes, which do request a smaller level ofimplication.
  • 16.            Risk  of  presbytia       The risk of presbytia in British Airways will be the change of consumer’sbehavior who want a better flying experience, and focusing a lot on the new way ofconsummation. It can leads to a lost of market share.Market  phases         British Airways is in different stages according to geographical area,concernig the short haul routes within Europe, it serves almost all of its segments, andit’s at maturity stage, it’s because of both the high competivity between carriers, andthe stability of demand. For the long haul routes, British Airways is at shake out stage. A proof of that,is the Indian market for example, which is the most profitable market after the UnitedStates of America outside the United Kingdom, thanks to its 30 million Indians livingabroad, and the growth of Indian economy.Market  differenciation  or  segmentation         British Airways does make a segmentation market dynamic, it offers a highquality of services onboard, which is differs the most from the competitors, itproposes a large range of products for different customers, and then it adapts the offerwith the demand.
  • 17. Market  strategies     In order to take a large market share, British Airways had done severaloperations, like developing global products, buying stakes in other airlines to expandits domination, launching other destinations, raising the fleet by purchasing aircrafts,creating a worldwide alliance, coordinating its management practices, advertisementand promotion in many channels, improving customer service at every level of apassenger’s journey, and dominates the traffic in London’s Heathrow airport,especially Terminal 5, which its infrastructure are controlled by the airline, anopportunity to establish a dominant position. As a result, British Airways product range dominates supply and coversseveral market segments, of the international air transport industry. In the market of airlines, the market share of British Airways grew to reachmaturity in term of short long haul routes, they serve each segment with a specificproduct, but after 2007, low coast carriers took more and more parts from airlines’market. On the long haul flights, British Airways has been attempting to implement aglobalization strategy leading to domination of the international airline market.But for the short haul flights, the domination of low-coast carriers like Vueling,EasyJet or Ryanair still grows. Since 2007 British Airways has had a lost of 5% ofmarket share, but low-coast carriers earn 24% of market share.                                                      
  • 18.   Concerning the differentation strategy, we saw previously that British Airwaystakes advantage from lurning curve to reduce its coast. For example, to well developtheir services onboard, the flat bed was an asset destined to first classes, it differsfrom other airlines, and the effect of this strategy was the positive image given by thecompany, and the consumers approved the quality of services in-flight during routes.Organization      Structure If you fly with British Airways, you find standardization worldwide of all theirproducts and services proposed for specific classes onboard or on the ground. The organization has more than 40,000 employees to work for the companyhas divided management-level positions into ten departments and each departmenthas own subordinates. The organization’s departments include investment andalliances, marketing, planning, ground operation, engineering, flight operations, IT,finance, law, and human resources.The functional organization of British Airways Information Human Engineering   and Finance resources   Law   Investment Ground Alliances   Marketing   operations   Flight Sales   operations   Customer service  Culture   At the beginning, King and Marshall found an airline that was in the“transportation business” and was not customer oriented. British Airways is changing its corporate culture by changing its headquartersbuilding. The old multistory headquarters near London’s Heathrow Airport reinforcedhierarchical and bureaucratic values that the airline was trying to cast off. The new
  • 19. headquarters is designed with a central village square and work units spreading outfrom it. Executives are located with their units, not cloistered on a separate executivefloor. Physical structures and spaces, such as British Airways’ village squareheadquarters, often symbolize the company’s underlying values and beliefs. The size,shape, location, and age of buildings might suggest the organization’s emphasis onteamwork, risk aversion, flexibility, or any other set of values.Values of British Airways’ employees:The values are to be: • Safe and secure • Honest and responsible • Innovative and team spirited • A good neighbor-concerned for the community and environmentProfile  of  individuals     British Airways gives incentive program to improve the commitment of theiremployees, and programs for selected positions, for example it also gave Ipad to theirair cabin’ members to have all information about each passenger. Apart from the technical side of the flying operations, responsibilities includethe recruitment, training and standards of 3,000 pilots and the safety training andstandards of 14,000 cabins crew. All of the employees have a lot of competencies, andexperiences in the airline industry, and managers are most of time graduated from infamous business school and universities in the world.Leadership  models   British Airways has European organization model based on commitment,wellbeing and culture, they are in the core of its employees. There is also a strongsocialization of values in the company.
  • 20. Value  creation       Strategic positioning school because she looks where the market growth andthe destinations that are more demanded by customers.On the following chart, we can notice that the profitability of British Airways is goodenough thanks to its “Value creation index” bigger than 1.However, Us Airways has a more comfortable place than its competitors thanks to itshigh ratios. In fact, the figures show that the share price of Us Airways bring backmore than the share price of British Airways. It generates cash because its return onequality is 134.64.      

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