virgin blue asignment
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Table of Contents1.0 Introduction...............................................................................................................................3
1.1 Company Overview:.....................................................................................................................3
1.2 Purpose of Report........................................................................................................................3
1.3 Tools of Analysis:.........................................................................................................................4
2.0 Internal analysis of Virgin blue:.......................................................................................................4
2.1 Identification of core competencies of Virgin blue......................................................................4
3.0 External Analysis of Virgin blue........................................................................................................6
3.1 Low cost strategy of Virgin Blue group:.......................................................................................8
3.2 Differentiation Strategy of Virgin blue:......................................................................................10
4.0 Environmental Analysis.................................................................................................................10
4.1 Competitive Environment of Virgin Blue:..................................................................................10
4.2 Competitive Rivalry....................................................................................................................10
4.3 Barriers to Entry and Exit:..........................................................................................................11
4.4 Supplier Power:.........................................................................................................................11
4.5 Buyer Power:.............................................................................................................................11
4.5 Threat of Substitutes:................................................................................................................11
5.0 Critical Assessment Effectiveness of above chosen Strategies:.....................................................12
6.0 OLI Paradigm Analysis of Virgin blue.............................................................................................14
6.1 Ownership Advantage or FSA (Firm specific advantage):..........................................................14
6.2 Location Advantage:..................................................................................................................14
6.3 Internationalization Advantage (IA):..........................................................................................15
7.0 Summary of strategic situation:.....................................................................................................15
7.1 Internal and external factors:....................................................................................................15
7.2 Gap Analysis:..............................................................................................................................16
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7.3 Strategic Options for Virgin blue:...............................................................................................16
8.0 Recommendations to adopt above strategic options:...................................................................16
9. Conclusion:......................................................................................................................................18
References:..........................................................................................................................................19
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1.0 Introduction
1.1 Company Overview:Virgin blue is Strategic business unit and subsidiary of one of the UK’s
largest private company (Virgin Group) which was founded by Sir Richard
Branson. This group has grown very triumphant private businesses in
various sectors ranging from Music, telecommunications, travel. Leisure,
transportation, financial services, holidays, retailing and publishing. It
established almost around 200 branded firms around the world with the
workforce of 50,000 people among 29 countries. The revenues generating
around the world by virgin group is around £10 billion.
(www.virgin.com)
This report basically looking at Virgin blue group only comprises of
various airlines Virgin blue, Polynesian blue, Pacific blue, V Australia
which has got headquartered in Queensland Australia. This group holds
4100 of workforce and acquires 32% of domestic airline market share.
It operates around 53 Boeing aircrafts in 22 Australian cities and this
group individually earns total revenue of approximately $2,169.1
million 2007 and $215.8 million of net profits.
(www.virginblue.com.au)
1.2 Purpose of Report
The main purpose of this report is to identify the key internal and external
factors that have influenced the Virgin blue group and strategies
employed with in the Australian airline industry. Once these
characteristics are determined this report will assessed the chosen
strategies it will conclude with at least two or three strategic options AHMED NAYEEMUDDIN ID: 08236986
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available for Virgin Blue Group with few strategic recommendations based
on the analysis performed.
1.3 Tools of Analysis:Various analytical tools are employed to within this report. In order to
carry out the internal strategic analysis of virgin blue this report will firstly
identify the core competencies of Virgin Blue and it will employ generic
strategy frame work developed by Prof Michael Porter. After performing
the internal analysis, this report will analyze the external industrial
analysis of virgin blue by employing Porters five forces model.
2.0 Internal analysis of Virgin blue: Value chain frame work is a handy tool employ to analyze the
internal activities in which company can practice its distinct core
competencies at its very heart, which can be in the shape of
differentiation strategy or low cost strategy (Mac Millan et al, 2003)
2.1 Identification of core competencies of Virgin blueCore competences according to Hamel and Prahalad (1994) are bunch
of distinct skills and technologies which allows firm to offer its customer
certain benefits. Core competences are not product specific as they
contribute towards variety of products and services competitiveness.
These distinct skills are not considered as core competences unless they
meet 3 tests like customer value, extendibility and competitor
differentiation. These all are considered as unique techniques on which
firms are good at and this can’t be imitate easily to affect competition (
Prahalad and Hamel, 1990).
Core competencies of Virgin group of companies are most obvious and
these competencies are applied to all SBU’s (Strategic Business Units)
around the world these are mentioned below:AHMED NAYEEMUDDIN ID: 08236986
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1. Strong brand name and reputation: Almost 96% of UK customer
considered virgin as their most admired brand. It holds about 200
different branded companies under one unified Virgin brand which
create barriers for competitors imitate its operational process and
corporate structure. Even (Prahalad and Hamel, 1990; Porter,
1985) states that sustainable competitive advantage and unique
techniques builds barriers which makes imitation complex.
Creative promotions with full ‘FUN’ style: Richard Branson
the founder of virgin group is considered as synonym of virgin
brand and its reputation. Not only had that he becomes the most
significant means of promotion and advertising which makes it
distinct. He creates challenges for competitors in funny and
entertaining way which builds positive emotions for customers
with the help of events. At the time of launching virgin mobile in
Australia he flew into the conference hanging from virgin
helicopter promising the locals to secure from costly mobile
operators. Branson’s charisma and entrepreneurial talent is
distinct asset that other competitors can’t imitate.
(www.virginblue.com.au)
Virgin People (Employees): Branson and his workforce (Virgin
people) make up the Virgin Corporation. Every SBU has been
given empowerment which helps them to instantly react to
market changes without concerning top management and it
allows them to be proactive. Branson says we are part of family
rather being hierarchy which shares ideas, solve problems, share
values, interests and fulfil duties with virgin twist.
(www.virginblue.com.au)
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Simple Corporate structure: The Virgin’s success is standing
on corporate parenting strategy that every new SBU posses
Virgin’s brand name, style of management, values and access to
resources. Virgin blues corporate strategy is standing on its
slogan ‘keep the air fair’. Competitive sustainability is
depending on how well they are operate to maintain Virgin
culture and decentralized under integrated brand. The main
question is whether this brand name allied with Richard Branson
remains same value for consumers even after he left. In order to
attain competitive advantage Virgin must assimilate its Core
Competencies in the internal processes and Virgin Corporate
culture. (www.virginblue.com.au)
3.0 External Analysis of Virgin blue According to (Porters, 1980) there are few basic options which are
faced by firms are fundamentally the scope of the market that the
company would serve and compete in. Competitive strategy focuses on
company’s tactics to attain the most beneficial position in its industry
(Pearson, 1999).
The company’s profit is basically the difference between its costs and
revenues. Hence profits can be boost either by high premium prices or
reducing the costs depending upon competition. Even (Lynch, 2003)
agrees that companies can attain competitive advantage fundamentally
through products and services differentiation or by offering lower cost
than those of competitors. This can be achieved by targeting their
products to broad target customers so that it can occupy most of the
market place or by only focusing on narrow targets inside markets.
(Porter, 1985) have generated three generic strategies which can be
employed to attain competitive advantage which are mentioned as follows
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1. Cost leadership strategy
2. Differentiation strategy
3. segmentation strategy
This framework is comprises of three generic strategies let’s see which
one is applies to Virgin blue’s strategies which are outlined below.
Virgin Blue’s main idea is to recognize itself as one of the most
leading Australian lowest fare airlines which offers low fare services to
customers by continuously developing its services and enhance low
cost offerings. (www.virginblue.com.au)
It has uses escalating techniques initiated by some of the well
known airlines such as southwest airlines and Ryan air. This has
eliminates costs by offering its customers inclusive in-flight meals and
printed tickets in support to sell food on board and providing easy
booking through telephone and internet. (www.virginblue.com.au)
It has reduces costs by limiting its service to number of airports by
operating only one flight (Boeing 737). It is offering less rate of pay than
its major competitor Qantas. The main and critical aspects of virgin blue
are cost containment and efficient operating system of its modus
operandi. Below are the some key components which contribute to make
virgin blue strategy feasible.
3.1 Low cost strategy of Virgin Blue group: Low fares: To boost the level of demand this low fare approach
is used. The virgin blue offers their tickets to business travelers
who never travel other than that and target them by providing
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them extra modes of transports such as car, train and bus. Low
fares are all also offered to one way travelers which are bit unlike
for traditional full service airline. High fares are set on the basis
of demand for specific flights and date of departure. 75% of
tickets are offered at low available fares once it is filled up they
will increase price per seat. (www.virginblue.com.au)
Frequent Point to point service: By using point to point
service on short haul routes it enables virgin blue to get away
with giving through service for connecting flight passengers. This
includes transit passenger assist cost and luggage transfers etc
and this is considered as one of the main differences between
traditional carriers and virgin blue. (www.virginblue.com.au)
Low operating costs: Virgins higher management believe its
operating costs are low among the most leading lowest
passenger airline. Four main expenses are outlined below which
virgin blue can control and trim down.
(www.virginblue.com.au)
Aircraft equipment costs: Virgin blue uses single type of aircraft
(Boeing 737) to control its acquisition costs. This is mainly to
minimize associated costs like personal training, maintenance
and spare parts to meet the everyday expenditure of flexible
crew scheduling and equipments. (www.virginblue.com.au)
Personnel expenses: In order to control its labor cost they
continuously improve the productivity of already strong
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productive e labor. Employees’ remuneration accentuates output
based incentives such as commissions for high on board sales
target for flight attendants; regions flown by pilots, number of
hours based payments and cabin crew on industry standard
limits of hours. (www.virginblue.com.au)
Customer service costs: virgin blue have sub contracted certain
operations under competitive terms to third parties on certain
airports like air craft handling, tickets and other services where
they found it is cost efficient. Internet bookings promotions have
removed commission of travel agents and it has brought drastic
growth in e-bookings which have lead to 90% of reservations day
to day basis. (www.virginblue.com.au)
Airport access fees : By delivering large volume of passengers on
certain airports has enabled virgin blue to have economical
negotiations for accessing their facilities.
(www.virginblue.com.au)
D. Commitment to safety and quality maintenance: Virgin’s
management is committed in employing and training of their pilots,
flight attendants and maintenance personnel. They all maintain the
aircrafts in accordance with top international airline industry standards.
Even though it operates its fleet in cost effective manner, without even
extending low cost strategy on the areas of safety, quality assurance
and maintenance. (Miller, 1992)
3.2 Differentiation Strategy of Virgin blue: Low cost air lines should
contemplate on differentiating their products and services by offering
customers frill containing products which must be highly rated by
customers in terms of value for cash. Virgin blue was the first one to bring
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in Live2Air in its flight a multi-channel satellite TV. The low cost carrier’s
strategies are twofold to obtain the legacy carriers and catch the attention
of higher-yield passengers and put in points of difference from other
(LCCs). (Doganis, 2001)
From the above analysis it is clear that the main success factors
of Virgin blue’s strategy are low fares, point to point service,
homogenous aircraft fleet, simple process of business and lean and
mean work force and differentiation of products.
4.0 Environmental Analysis
4.1 Competitive Environment of Virgin Blue:4.2 Competitive Rivalry: Virgin blue’s level of strength in competitive
forces which is very high since the possibilities at stake is substantial in
terms of capital expenditures. The nature of this industry demands large
amount of capital to spend to just cover operating expenses, in addition
maintenance, expansion of services and regulatory approval requires the
same. “The firm orders are valued at $420 million and the
potential value is $840 million if covered all options are
converted” (Mc.Clearn, 2005, p.24). These types of huge figures are
attached to every service brought to market; competitive forces of this
industry are extreme.
4.3 Barriers to Entry and Exit: Due to heavy costs and high risks allied with
airline industry the entry of competitors is not a major threat. However,
high value of services has high impact on the level of rivalry. Heavy
financial requirement of this airline industry both entry and exit no doubt
that competitive alliances and consolidations are standard rather than
discharge.
4.4 Supplier Power: Virgin blue being an Australia’s largest regional airline
has some leverage on its suppliers like, meal caterer, jet fuel refiners and
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supply related agencies. This enables virgin blue to demand lowest prices
for contracts. Hence it shows that it has power over its suppliers.
4.5 Buyer Power: Traditionally customers were not given many choices in
airline industry in fares to destinations on which there are limited airlines
that operates on any given route. But by introducing low fare air lines
virgin blue have changed this dynamic by offering a number of choices for
any given destination, of different fares provided by other airlines
(Shaw,2004).
4.5 Threat of Substitutes: Threat of substitutes is a greatest threat to
virgin blue because usually in this industry it comes in the shape of other
low cost airlines. This because of their extremely thin margins and low
costs of operating undercuts the other traditional airlines in every feasible
style (Grescoe, 2004, P.12). An airline mainly depends on cutting down
operating costs to maximize their profits. Any kind of inconsistency in this
cost structure no doubt create losses that’s why new airlines have high
power over traditional carriers which made them to establish low fare
airlines.
5.0 Critical Assessment Effectiveness of above chosen Strategies:From the above outlined internal strategic analysis based on porters
generic strategies it is confirmed that Virgin blue have employed both low
cost strategy and differentiation strategy.
Porter (1980) says if a firm fails to make choice between differentiation
and cost leadership basically means that it is stuck in the middle and it
will lead to poor financial performance. However, Miller (1992) and Kay
(1992) have referred to real examples of Toyota and Benetton the two
successful firms who have implemented more than one generic strategy.
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Both firms use low cost and differentiation concurrently and were
successful.
The current strategy of virgin blue stays unaffected by its unique market
strategy when it has joined Australian market. It’s mentioned earlier its
corporate strategy stands on its slogan “keep the air fair”, and this is
attain by LCCs (low cost carriers) business model. However it is evolving
this LCCs model into transformational strategy of business based on
network carrier model of business where it is striving to be a new world
carrier, which is nothing but airline which get utmost yield by giving first
class service. The consent is that company’s strategy depends on low
cost generic strategy but use service delivery as major differentiator in
market. (www.virginblue.com.au)
In early 1980s there was extensive use of generic strategies of porter
which were considered as essential for strategy and the ideas what he
recommended. But after some time it was clear that in actuality it has
some shades of grey in difference between cost and differentiation as
compare to white and black which is expected in theory. It becomes very
complicated for companies to over look cost completely doesn’t matter
how distinct their product offering is. In the same way firms will not
expose that their product is basically the same as of others (MacMillan
et al, 2000)
If you observe one of the Virgin blue’s strength is low cost operations but
on the other hand it has got Achilles' heel like service resources are less
by low cost. (O’Connell and Williams, 2005)
Low cost positioning means choosing to perform a system of activities
differently from that of traditional rivals and providing a coherent set of
key activities that reinforce each other to achieve such position in a
sustainable manner (Porter, 1996). However there is a risk involve in
just following the cost leadership strategy which focuses only on dipping
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costs, yet sometime at the cost of other important factors, it may become
very overruling that firm loses vision of why it has depend so much on
this strategy. (O’Connell and Williams, 2005)
As One of Virgin blue’s competitors Ryan air, Jet star has also adopted the
same strategy by prioritising its strategic position in market on short term
profit maximisation. It has employed low cost strategy to cut prices even
more to strengthen the financial pain on their competitors (Albers et al,
2010).
In contrast with cost leadership strategy, there is a practical fact to
sustain the differentiation strategy that one of the findings on study of 64
American companies reveals that there is superior performance for firms
who follows differentiation strategy (Hall, 1980). Porter (1996) also
states that firms, if establish a difference that it can shield then it can
outperform its competitors.
6.0 OLI Paradigm Analysis of Virgin blueDunning (1981) has developed an OLI Paradigm framework used to
analyze the decision to engage in FDI (Foreign direct Investment) which is
indentified on the basis of 3 types of advantages to firm provided by FDI
in comparison to exports which are out lined below:
6.1 Ownership Advantage or FSA (Firm specific advantage): It is usually the tangible and intangible assets that which forms
competitive advantage benefited to firm like for airline it can be
associated to their reputation, capital, structure of ownership, economies
of size and leadership. In general LFA (low fare airlines) enjoys a good
reputation (Lawton, 2002). Virgin blue as a part of virgin group does holds
this advantage in the shape of Richard Branson. It is one of the major
Australian low cost airlines which only use low maintenance fleet (Boeing
737-700). Virgin blue has advantage to become successful multinational
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LFA as it possess some unique benefits from its competitor which can
vanquish the operating cost in abroad markets (Albers et al, 2010).
6.2 Location Advantage: Benefits of location (CSA-Country Specific
Advantage) will influence the mode of airline entering the abroad markets.
This study ropes that the choice of location is mostly determined by
market prospective and level of rivalry/competition in that market LFA
mainly internationalize such markets which offers substantial intensified
growth opportunities. This is type of situation for Virgin Blue can obtain
advantage at carrier level which can be set up in Asia-pacific environment
where competition is limited because half of the LFA doesn’t provide
international services. Mostly LFA are based in densely populated area
which offers huge potential passenger base as well and where rivalry is
limited. The low fare hub of Asia the Singapore with outstanding
geographic areas, where quite a lot of LFA’s holds home bases and
serving several carriers. (Albers et al, 2010).
6.3 Internationalization Advantage (IA): One of the significant advantages
of internationalization for LFA is quality control and ability to avoid
uncertainties of services to customers. An actual fact linked with FSA of
reputation and brand name in which Virgin blue is considered as an
effective service delivery LFA. ). Flat governance LFA can easily influence
this sort of flexibility and speed-associated internalization advantages as
far as possible. (Gillen and Morrison, 2003)
There are four modes of international entry like Code contractual
alliances, Own bases, National subsidiaries and FDI (foreign direct
investment). Code contractual alliance is risk loaded and less capital
intensive strategy to expand and enables LFA to knock into the markets
yet intact by their first moving rivals. Establishment of own bases strategy
is used by pioneers like Ryan air and easy jet the rivals of Virgin blue.
(Gillen and Morrison, 2003)
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7.0 Summary of strategic situation:
7.1 Internal and external factors:The result of the virgin blue’s strategic analysis exposes that it is a highly
innovative and leading cost effective airline of Australia. It is prepared to
embrace latest strategies and business techniques so that they can
enhance not only their cost saving strategies but also end in intangible
advantages like good will and reputation. Externally Virgin blue is just
working in local market of Australia which is demanding high class service
locally as well as internationally from the airline rivals and to drive change
in this kind of market just low fares are not enough to cope with high
customer traffic.
7.2 Gap Analysis:According to gap analysis of Virgin blue it is said that it fall short as
renowned leader in every airline service class. This sort of bad
appearance in best airline Awards, it should focus on its ranking in top 5
airlines service classes: best low fare airline, best airline alliance and best
cabin crew (www.worldairlineawards.com).
7.3 Strategic Options for Virgin blue:Virgin blue has so many strategic options obtainable such as
advancement of its aircrafts, workout on its cost effective strategies even
more, and expansion of its services (Internationalization) which is drawn
upon the analysis of OLI paradigm to become international low fare
carrier(Albers et al, 2010).. It should also improve its customer visibility
on internet by extending it and must improve customer fulfilment ratings .
In order to improve its overall financial performance virgin blue may
consider the initial public offering of its share IPO which will enable it to
have bigger access capital and strong market drive.AHMED NAYEEMUDDIN ID: 08236986
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8.0 Recommendations to adopt above strategic options:
In order to upgrade its aircrafts it has to buy advance models of
Boeing which are more beneficial in operating international low fare
airlines.
It has to work out on its cost effective strategies bit more as its
major competitors Ryan air, Qantas and South West airlines are also
cutting down there operating costs by marking their margins down
to attract customers.
To improve its customer satisfaction rate and become among the
top 5 best airlines it has to make their service more attractive by
offering low prices for best in class service than their competitors. It
can also develop personalized media centre for all customers which
comprises of following (Ragins and Greco, 2004):
a. Updating interactive content consists of industry news, full flight
information, travelling information and adding search related
browsers.
b. For purchasing and selling of tickets including other amenities
like travel necessities, hotels and rental transports they need to
provide Commerce centre.
c. Online survey materials java based must be uploaded for
customers to fill in figure out satisfaction levels of customer and
comments on Customer relationship management of Virgin
Blue(Kotler et al, 2000).
In order to expand its services at international level it should
analyze the low competitive markets such as Singapore a low fare
hub of Asia which is outlined above in OLI analysis. There are
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favorable options available for Virgin blue as per the above analysis
like Firm specific advantage is good in the shape of Richard
Branson’s image around the world.
Virgin blue can adopt any of the options available to it from the
above OLI analysis to internationalize itself such as code contractual
agreements which are less capital intensive, or by building their own
base, or by having national subsidiary through FDI by holding stake
but can still operate under same brand name.
9. Conclusion:Conclusion of this report is drawn upon the internal and external analysis
of Virgin Blue airlines. Virgin blue is one of the best low fare airlines within
Australia which holds about 32% of its market share which is a sign of
successful airline firms. However due to heavy competition in the market
it needs to observe its strategic position frequently to figure out always
available strategic options in order to keep up with competitive market .
For the firms competing in low-margin, high cost environment, every
strategy that generates market differentiation along with functional tools
of CRM which are part of its core business strategies(Kotler et al, 2000),
is greatly smart way of attracting customers. Above strategic option of
internationalisation reveals that market is demanding international low
fare airlines with best in class services. To become successful low fare
airlines in future Virgin blue needs to find appropriate environment to
make their strategic options work effectively. In order to use available
strategic options this market demands heavy capital so it needs to
strengthen its financial position which can be done by IPO. There are
some recommendations which may be help full in utilising the strategic
options available to it.
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Web Sources:
www.virginblue.com.au
www.worldairlineawards.com
www.virgin.com
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