Strategic Management Week #7

Strategies for a single business:

-2 key generic strategies: cost leadership & differentiation -Generic in that they can be applied in many different industries -Key in that they can be particularly powerful

What's inimitable for AirAsiaX?

-Economies of Scale: Others are at a larger scale. -Learning Curve: They are new. -Modes of Operating: Largely "hardware." -maybe culture? -labor arrangements may be imitable. -Product Choices: Easy to imitate. -so are the terminals, plane types, etc. -Differential access to low-cost resources- "parental subsidy?"

Tools to conduct strategic analysis:

-External analysis -Internal analysis

Low-Cost Strategy Recommendations

-If you have a VRIO low-cost resource and aren't using it, in which industry should you use it? Alternatively, when is pursuing VRIO low-cost resource the right choice? - large volume - homogeneous customers - price focused -If you have a VRIO low-cost resource, how should you grow? - DOUBLE DOWN ON IT -add on more resources that generate low costs -appeal to large volume "average" customers -focus on volume

What are the driving low costs for AirAsiaX?

-Minimum staff -No jet-bridge -Low cost culture -Maximizing seat capacity -Aircraft utilization -A la carte flight experience -Aircraft selection -Premium seats -Low labor costs -Shared resources with AirAsiaX

Drivers of economies of scale

-Specialized machinery, people, processes, etc. -Use the same plant and equipment to produce more units. -Volume discounts.

Structured as a Functional Organization

-Structured around jobs -e.g., finance, accounting, operations, sales, HR, etc. -less around products/markets/innovation -Clear hierarchy -clear responsibility

Diseconomies of scale

-Systems may not be able to handle volume or speed. -Problems with equipment and supplies. -Worker demotivation. -Firms that avoid these may have an advantage.

Cost Leadership Strategic Choices

-The overriding goal of the cost leader is to increase efficiency and lower its costs relative to rivals. -A cost leader doesn't try to take the lead in product differentiation. -A cost leader positions its products to appeal to the "average" customer to increase volume.

Sources of low costs:

1. Economies of Scale 2. Learning Curves 3. Differential Low-Cost Access 4. Modes of Operating ("Technology") 5. "Policy" Choices

AirAsiaX: Where to go from here?

1. Goal: Use VRIO- low costs to reinforce activities. -Keep imitable sources of low costs, but realize they are subject to being matched by some. 2. Local Malaysians -Investment in future growth? -Take advantage of non-savvy? -Packages? Easy travel planning? -Can policy choices make costs low enough that demand explodes? 3. Malaysian Tourists -Bigger market -Not focus to date 4. Connecting Traffic -More competition: doesn't use inimitable resources-but might fill seats. -not connected to Malaysia, other countries subsidize too. -Offer discount to connect, not premium.

AirAsiaX: Where is volume going to come from?

1. Local Malaysians -Population of~30 million -How many of them will take long-haul travel a year? -Extremely price sensitive -Not savvy 2. Travelers to Malaysia -25 million arrivals, 6 million from outside of ASEAN 3. Worldwide Travelers -Japan~25 million arrivals -US~75 million -Australia~9 million -~1200 million worldwide

"Policy Choices" & VRIO

1. Rarity -Not usually. 2. Inimitability -Rarely- especially if observable. -Maybe?- if enmeshed in how the firm works. (Lack of incentive for others to copy)

Elements of Organization for Low Costs

1. Reporting Structure: Hierarchal structure with clear accountability, Tight Controls. 2. Design of Tasks: Clear roles & responsibilities 3. Compensation: Clear metrics aligned with cost reduction

Compensation

Compensation Policies - clear performance metrics - typically tied to cost-reducing efforts - incentives for employees to work together and reduce costs

Low costs are valuable, but not, on their own, a source of _____.

Competitive Advantage

When does a low-cost strategy make sense?

Low costs are especially valuable when: - volume is or can be large - rivalry is price focused - buyers care mostly about price - care less about features, more willing to switch to save a bit. - low costs are effective barriers to entry

What is AirAsiaX's strategy?

Low-cost, long-haul, air travel where low costs allow it to reach leisure travelers who previously would not have flown and in locations unserved by budget airlines.

Low costs often generate reinforcing cycles=>

Lower costs => Lower prices => More Volume =>

Organizing for Cost Leadership

Lowering costs is usually a game of inches, not miles. -less about creativity & new ideas -more about streamlining and optimization

Controls

Management controls - tight cost-control system - frequent & detailed cost-control reports - emphasis on quantitative cost goals & targets - close supervision of labor, raw materials, inventory, and other costs

Economies of Scale

The bigger you are, the lower the average cost per unit produced. -Rarity: Sometimes rare in new/fast growing/changing industry -Inimitability: Often not! Exceptions: 1. When the market is only big enough for 1 efficient-sized firm. 2. When other barriers to entry are in place.

Low costs=

Valuable

What features & services to sell; "Policy Choices"

Value -Product choices. -Features, standardization, etc. -Includes service, support, etc.

Learning curves, aka, "economies of experience"

Value -The more the firm has ever made, the better it gets at making. -The more complicated/technical the process, the greater the experience advantage. -Learning curve effects in variety of functions: manufacturing, purchasing, service, etc. -Expansion may propel a firm down the experience curve because of higher volumes. -More important in some industries than others.

Modes of operating (i.e., "technology")

1. Value -"Technology" is a misleading name. Means all the ways in which the firm operates. -E.g., IT that makes companies more efficient. -Book calls this "hardware." -E.g., process, routines, teams, culture, ways of working. -Book calls this "software." 2. Rarity -"Hardware"- no if firm buys it. Maybe if they have special ability at it. -"Software"- often. Firms often develop their ways over time. 3. Inimitability -"Hardware"- usually not. But maybe proprietary or enmeshed in how firm works. -"Software"- usually. Can't simply recreate culture and ways of working (social complexity).

Differential low-cost access

1. Value: Being able to buy an input-raw materials, labor, location, etc.-for less than the competition. -Control a key input or buy it up before others see the value 2. Rarity -Sure. In the name 3. Inimitability -Only when a result of history (i.e., being a first mover, path dependence).

Learning curves, aka, "economies of experience"

1.Rarity: sure, first-movers usually have an advantage. 2.Inimitability: sometimes, other firms can copy if: -Can later firms catch up in learning? -Can later firms hire people in the know? Or otherwise buy the learning? -Is the product/technology evolving so that old learning isn't important?

Tasks

A clear structure with lots of data. - clear job roles - clear metrics & data

AirAsiaX: Low Costs & Volume Reinforce Each Other

AirAsiaX needs volume: -Need to fill the plane -few high-price customers to justify a half-full flight -Need to sell and market amenities