Alma de México - Business Model Analysis Framing Opportunities for Innovation

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Alma de México - Business Model Analysis Framing Opportunities for Innovation

  1. 1. Centro de Innovación Tecnológico de Monterrey Daniel Pandza | Managing Director | Centro de Innovación pandza@itesm.mx [T] 36 69 30 00 ext. 1028 [C] 044-331-2655131 Case: Alma de México Exploring New Innovation Opportunities throughout the Business Model February 2008
  2. 2. Case: Alma de México 2008 I. SITUATION ANALYSIS: Alma was founded on June 12th, 2006 and achieved in just a short period of time a 3.5% market share. The company is not following a typical quot;low-costquot; carrier business model and it does not want to quot;educatequot; it´s customers to be seeking for $1 peso tickets, free airport transportation, etc. Since it´s foundation the company has achieved between 3.08% (see table 1 below) and 3.5% (according to Jorge de Lara) market share, transporting 60% less passengers than segment leader VOLARIS and 52% less than INTERJET. Considering all Mexican airlines, Alma de Mexico has reached place 11 out of 14 airlines (see Appendix 1). TABLE 1: MARKET SHARE LOW COST AIRLINES: AIRLINE % PASSENGERS Source: Infosel News Volaris 7.71% 1,505,471 (2007). Click de Mexicana 7.60% 1,484,369 Alcanzan 33% Interjet 6.40% 1,250,527. Participación del Mercado Nacio- Viva Aerobús 4.56% 890,102 nal Ene-Sept. , Nov. 8, 2007. A Volar 705,862 Alma 3.08% 601,874 (ISI Emerging Markets) As a first company of its kind, Alma de Mexico is flying with smaller Bombardier Jets (seating capacity of 50 to 80 seats), which is seen as the ideal for the medium to low density market in Mexico. By the use of these kinds of planes, the company intends to capture more and more medium-to-low density markets within the country. Alma´s Route Network According to De Lara this goal should be achieved in 2008 a). by increasing the number of routes from 50 to 90 and becoming the airline with the most extensive route network, and b) by increasing the company´s competitiveness through the offering a more flexible itinerary (i.e. by increasing the frequency of departures). As a brief review of recently published news articles indicates, the strategy of increasing the frequency of departures from / to a specific location is pursued by a broad range of airlines in the sector (see Cepeda, Francisco (2008). Multiplican aerolíneas sus vuelos. Palabra - Negocios, Agencia Reforma, January 24, 2008, BD: ISI Emerging Markets, for more information). Source: Jorge A. de Lara. 25.02.2008 Based on this understanding of the general situation Alam´s business model has been analyzed. 2| Tecnológico de Monterrey | Centro de Innovación | pandza@itesm.mx
  3. 3. Case: Alma de México 2008 II. CHALLENGES FOR 2008 Alma de Mexico´s goal for 2008 is to almost double its participation in the market and achieve a market share of almost 7%. Increasing sales without lowering prices or increasing costs (due to low profit margins) will be the key challenge for the company! In the following graph I have depicted the Business Model Framework and highlighted some key elements that I find crucial for the successful achievement of the goals that the company is aiming for. Osterwalder, Alexander (2004). Business Model Onthology. Doctoral Thesis. HEC-Lausanne. Switzerland. VALUE DISCIPLINE RELATED ISSUES: 1. COST STRUCTURE One of the key elements of Alma´s business model is a low cost structure. Without having reasonable costs, the company will fail to compete a. against other low cost carriers that have entered the market before Alma and quot;educatedquot; the customers to seek for quot;everyday low pricesquot;. Despite the fact that Alma does not want to compete / position itself as the quot;cheapestquot;, but as the airline with the best routes, frequent departures, etc. for a fair price, Alma needs to maintain a relative low cost structure. Potential framing questions that inspire the ideation process...  What are the main cost drivers?  Do these attributes really important for the typical customer?  How can these costs be minimized?  Can some of the activities be outsourced to third party suppliers? 2. PARTNER NETWORK From my personal point of view, having a solid partner network is crucial for achieving Alma´s commercial goals for 2008. Why? Because the company wants to reach new customer segments (non users / users of the competition) but lacks the financial resources to pursue this goal on it´s own. Hence the company needs a powerful ally who opens doors to a broad range of new customers. Potential framing questions that inspire the ideation process...  What kind of company / organization has the potential and interest to share it´s customers with Alma?  What are the incentives for this company (other than financial rewards that Alma cannot afford to pay due to small profit margins)?  Will these alliances cannibalize existing sources of revenue? Does the partner fit to Alma? How? 3| Tecnológico de Monterrey | Centro de Innovación | pandza@itesm.mx
  4. 4. Case: Alma de México 2008 STRATEGIC OBJECTIVE RELATED ISSUES: 3. DISTRIBUTION CHANNELS & PURCHASING PROCESS Alma is already using a broad range of distribution channels. The most cost effective one in the internet. Unfortunately, a large part of the population (=potentially interesting market segment with a lot of growth potential) here in Mexico has certain reservations with using the internet in order to purchase goods or services. On the other hand, the part of the population that is already used to using the internet has developed the abilities to quickly explore the websites of competitive offers. These customers can quickly compare prices and will, most probably, make their decision based on price and price alone. Alma is exploring the possibilities to broaden it´s distribution channels (call center, strategic alliance with Mexicana, strategic alliance with Amadeus) . However, often these channels add costs (=profit margins for the distributor) and this should be held to a minimum. Finally, you have to consider that making a reservation & purchasing the ticket is only one part of the whole process. The customer needs to pass through a process that consists of many more stages (information search, price and timing comparison with other airlines, online registration of personal data, ticket purchasing & payment, pick up ticket, travel to airport, park at airport, check-in, find gate, etc.). All these stages of the consumption life cycle contain, from my point of view, opportunities for innovation. Potential framing questions that inspire the ideation process...  What could be interesting incentives for customers to purchase their tickets online?  How can the company lower customer´s perceived risk?  How can the company reduce the factors that limit the diffusion of innovations (skills, access, time, wealth)?  How can Alma improve it´s relative advantage? Observability? Triability?  With what kind of behavior are the new target customers more familiarized (=compatibility)?  How can the complexity of the purchasing process be reduced? 4. CUSTOMER RELATIONSHIP MANAGEMENT & LOYALTY Developing a loyal customer base is one of the most challenging tasks for Alma. As explained previously, customers were already quot;baldy educatedquot; by pioneering companies in the industry and look for quot;everyday low pricesquot;. Their agility with the use of the web helps them to quickly check-out the prices of competitors and select the best bargain. Potential framing questions that inspire the ideation process...  How can Alma create a base of loyal customers?  What would be attractive incentives for customers to, in the best case scenario, buy all their flight tickets at Alma?  What kind of incentives are other companies using?  What are the necessary skills (capabilities) that Alma would need to develop in order to satisfy their customers?  Would this idea require a reasonable investment (benefits > sacrifices)?  What kind of customer segments would be interested in quot;monogamyquot; and the development of a long term relationship with Alma? Why?  Why do many customer segments not want to sign an exclusive agreement with Alma? What are the quot;sacrificesquot; that they might be perceiving? And how can Alma eliminate these barriers? 4| Tecnológico de Monterrey | Centro de Innovación | pandza@itesm.mx
  5. 5. Case: Alma de México 2008 5. CUSTOMER SEGMENTS Alma de Mexico currently targets both, corporate clients (i.e. signing preferential agreements with big corporations). Moreover, they are developing now programs for students in order to tap into and bond with new segments. Potential framing questions that inspire the ideation process...  Who is currently not using air plane services? Why?  What are the factors that are limiting adoption? Access? Wealth? Time? Skills?  How can the company eliminate some of these factors in order to tap into new market niches?  Is the niche big enough (=profitable)?  How would the company need to adjust it´s value proposition in order to attract this new market segment? 6. REVENUE STREAMS Companies rely on 4 different types of revenue streams. Single stream (example: customer purchases a house and pays in cash) Multiple stream (example: customer pays rent for a house) Interdependent (example: customer gets a printer or a razor for a very low price, but pays high price for the color cartridges / razor blades) Loss leader (example: company attracts customers with products that are very cheap, and due to convenience the customer buys other products that have very high profit margins) Based on these types of revenue streams there are different types of revenue models that companies use: Volume or Unit based (Coca-Cola can, bottle 1L, 2L 3.3L) Subscription / Membership (Golf club membership, Sport-City) Advertising Based (Casaverde does not charge the person who is searching for a house, but finances it´s expenses through the advertising revenues that it has generated from people who want to sell the house). Licensing & Syndication (Seprotech has decided to not produce wastewater treatment plants anymore, they license the technology to Valsi Corporation). Transaction fees (Travel agency charges the airlines a specific transaction bonus. Another example are auction houses like ebay). Potential framing questions that inspire the ideation process...  Which of the previously mentioned revenue models is Alma applying?  Which are the typical revenue models of the low-cost airline industry?  Do you see an opportunity to charge customers through different revenue models?  Are your ideas in line with the Value Discipline of Alma de México?  Does this new approach cost a lot of money?  Who will cover eventually additional expenses? Can you think of a potential partner? 5| Tecnológico de Monterrey | Centro de Innovación | pandza@itesm.mx
  6. 6. Case: Alma de México 2008 VALUE PROPOSITION RELATED ISSUES: 7. VALUE PROPOSITION Alma de México is providing a relatively commoditized service offer to customers who are seeking for point to point travel. The common service attributes where companies in the industry are competing on are: ELEMENT SERVICE ATTRIBUTES Product - No frills point to point travel - Frequent landing and departure times - Broader destination network - New planes - Security - On-time departure and arrival - Airport shuttles - … Price - Low price - The earlier you book your flight, the cheaper the ticket - … Place - Internet site (cheaper tickets) - Airport office - Phone Reservation - … Promotion - Discounts and promotions for corporate clients - … Processes - Quick boarding - Efficient ground handling, - Regular airplane maintenance, - … Physical Evidence: - Easy to use website - Uniforms - New & clean planes - … People - Friendly staff - … Most of these attributes, however, can be categorized as “must be” attributes and offer only little differentiation from competitive offers. In addition, it can be highlighted that many attributes that today do lead to a competitive advantage (i.e. broad destination network) can be defended only to a certain point against the competition as the entry barriers into these new market segments are limited only by the high investment that are required in order to acquire new planes. Both, established airlines that do own a large fleet of planes, as well as other “low-cost-carrier” could sooner or later attack these niches. Even if any one of the 11 competitors attacks 2 different locations, Alma´s differentiation could be easily weakened. Potential framing questions that inspire the ideation process...  What kind of air-travel related new service attributes can the company introduce in order to gain competitive advantage over competitors?  What kind of non-flight, but customer need related service attributes can the company introduce in order to gain competitive advantage over competitors?  Does the attribute help to sustain Alma´s competitive advantage for a longer time period or does it lead only to a temporary competitive advantage? 6| Tecnológico de Monterrey | Centro de Innovación | pandza@itesm.mx
  7. 7. Case: Alma de México 2008 CREATIVE COMMONS: This work is licensed under the Creative Commons Attribution-Noncommercial-Share Alike 2.5 Mexico License. To view a copy of this license, visit http://creativecommons.org/licenses/by-nc-sa/2.5/mx/ or send a letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, California, 94105, USA. DISCLAIMER This report has been developed by Daniel Pandza for non-commercial use with the objective to demonstrate the process of systematically exploring opportunities for innovation across the business model. Contact the author: Daniel Pandza, M.A. [http://www.linkedin.com/in/pandza] Managing Director | Innovation Center Tecnológico de Monterrey | Campus Guadalajara O: 0052 (33) 3669 3000 ext. 2266 C: 0052-1 (33)1265 5131 M: daniel@paradygnamics.com B: http://paradygnamics.com BUSINESS MODEL INNOVATION CANVAS: For more information about the Business Model Canvas depicted on page 3 of this report please visit Alexander Osterwalder´s blog http://business-model-design.blogspot.com/ or contact him mail@businessmodelhub.com 7| Tecnológico de Monterrey | Centro de Innovación | pandza@itesm.mx

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