ASSIGNMENT COVER SHEET Surname
Shumba Brighton
First Name/s
133153 Student Number
Strategic Management Subject
One (1) Assignment /Project Number
Shiksha Reddy Dr Tutor’s Name
East London Examination Venue
13 May 2016 Date Submitted √ Submission ()
Postal Address
First Submission
.resubmission
16 St George Street Southernwood East London 5200
[email protected]
E-Mail (Work) (Home)
Contact Numbers
Course/Intake
(Cell) 083 559 6499 MBA Year One Jan 2016
Declaration: I hereby declare that the assignment submitted is an original piece of work produced by myself.
Signature: B.Shumba.
Date: 13 May 2016
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SOUTH AFRICAN AIRWAYS 2016 STRATEGIC PLAN
Presented by Brighton Shumba
May 2016
Table of Contents 2
Executive Summary.................................................................................................. 4 Acronyms................................................................................................................ 5 Introduction.............................................................................................................. 7 South African Airways Background.............................................................................. 7 Vision................................................................................................................... 8 Mission................................................................................................................. 8 Long Objectives........................................................................................................ 8 Values.................................................................................................................. 9 Situational analysis................................................................................................... 9 Industry description /trends..................................................................................... 9 Industry challenges.............................................................................................. 10 Challenges facing SAA......................................................................................... 10 Financial challenges.......................................................................................... 10 Ageing fleet..................................................................................................... 11 Leadership challenges....................................................................................... 11 Macro-environmental Analysis............................................................................... 12 Political factors:................................................................................................ 12 Economic factors.............................................................................................. 12 Social factors................................................................................................... 13 Technological factors......................................................................................... 13 Environmental factors........................................................................................ 14 SAA’s competitors................................................................................................ 14 Competitive analysis: Porter’s five forces.................................................................15 SWOT analysis.................................................................................................... 18 Strengths......................................................................................................... 18 Weaknesses.................................................................................................... 19 Opportunities................................................................................................... 20 Strategy analysis: Potential strategies........................................................................21 Evaluation of potential strategies and recommendations...............................................22 Low cost provider strategy.................................................................................... 22 Focused (market niche) strategy based on differentiation...........................................23 Best cost provider strategy.................................................................................... 24 Broad differentiation............................................................................................. 25 Focused (market niche) strategy based on low costs................................................25 3
Recommendation of strategic direction.......................................................................25 Marketing plan........................................................................................................ 27 Human resources plan............................................................................................. 28 Conclusion............................................................................................................. 30
Acronyms FoE – Friends of Earth SAA- South African Airways
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SACAA – South African Civil Aviation Authority SMS – Safety Management System DPE – Department of Public Enterprises RSA – Republic of South Africa ADB- African Development Bank IT – Information Technology UJ –University of Johannesburg HRD –Human Resource Development GDP- Gross Domestic Product MRO –Maintenance, Repair and Overhaul
Executive Summary South African Airways (SAA) is currently experiencing challenges ranging from loss of market share, negative profits, labour issues, management challenges and 5
dwindling revenues. The airline is wholly owned by the government of the Republic of South Africa and it relies on government guarantees and bail outs. There is leadership crisis at SAA, with the troubled national flag carrier having been run by 7 different CEOs for the past 5 years. In the light of the challenges facing the airline, a strategic direction
will be provided for the airline as a bailout solution. It is
anticipated that the recommended strategies will bring stability to the airline while at the same time creating a favourable environment for it to return to a profit making trajectory.
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Introduction In the current turbulent business environment, where business earnings and margins are not lucrative, organisations need to find innovative
ways to complement their
revenue growth (Fin Week, 2013). Formation of partnerships with hotels, car rental and travel agencies to bring value added services and products to customers are crucial in the airline industry. This will attract more customers and hence higher passenger numbers resulting increased revenue inflow.
Cost cutting through
improved investor management as well contract management and tracking is vital. In addition to that, investment in IT is essential and this involves using IT as a catalyst to improve business objectives. The main objective of this document is to provide strategic direction to South African Airways. It is anticipated that the strategic plan will drive the organisational sustainability focusing financial wellness, organisational capability as well as corporate governance. A situational analysis of the organisation will be done and this includes industry analysis, competitor analysis, internal and external analysis. The effect of the macro-environment on the performance of the organisation will be discussed. Challenges in the Airline industry and those affecting SAA specifically will also be discussed. Based on the comprehensive situational analysis, the discussion will recommend strategies that will create a favourable environment for SAA to achieve its business objectives. The strategic direction will be coupled with Marketing and Human Resource plans.
South African Airways Background Founded on 1 February 1934, SAA is one of the world’s “largest established” airline (DPE, 2016). It was established after the South African government acquired assets and liabilities of a private airline called Union Airways to create a new national airline –South African Airways. South African Airways is regarded as a “strategic asset” of the government and it is wholly owned by the state (McDonald, 2014). He argues that although SAA operates in a “highly competitive” global environment it remains Africa’s 3rd largest airline in terms of its network and frequency of its flights. As a leading carrier in Africa, SAA services 56 destinations within South Africa and the continent (DPE, 2016). In addition to these domestic and regional operations, SAA also services 9 7
intercontinental routes.
SAA’s primary business includes provision of passenger
airline and cargo transport services. SAA has subsidiaries namely SAA technical, Mango – a low cost carrier and Air Chefs. SAA is a member of the Star Alliance, the largest International airline network. In terms of awards, SAA has been getting “Best Airline in Africa” award in the regional category for 12 consecutive years and winner of “Service Excellence Africa” for 3 years. Vision: “To be a profitable African airline with global reach” (www.flysaa.com). SAA’s vision goes hand in hand with its mission of delivering sustainable profits and growing the market share by offering world class service to customers. SAA continues to focus on its operations in Africa, expanding where there are opportunities. On international routes, the focus is to ensure that the routes are profitable and sustainable. SAA’s vision has got a gap. It does not reflect short term or long term ambitions of the organisation. There should be some timeframes so that effort and some commitment can be put in place in order to achieve this vision. Mission: “To deliver commercially sustainable world class air passenger and aviation services in South Africa, the African continent and to our tourism and trading partner” (www.flysaa.com). There is a correlation between the vision and the mission. A combination of these 2 gives SAA a strategic direction.
Long Objectives
To support South Africa’s national developmental agenda To achieve and maintain commercial sustainability To provide excellent customer service To achieve consistent ,efficient and effective operations To foster performance excellence
Values Customer focused 8
According to SAA (2016), SAA anticipates and strives to understand the unique needs of their customers through “tailoring” customer specific
solutions. Integrity They strive to practise high standards of ethical behaviour in all lines of work and maintaining credibility by making certain that actions are
consistent (SAA, 2016). Accountability Taking responsibility of individual and team actions, decisions and results by establishing clear plans and goals, and measuring progress against
specified goals is one of SAA’s key values (DPE, 2016). Safety Safety is a key element in the aviation industry. SAA has adopted a zero defect mortality and it strives for zero accidents through proper training, work practices, risk management and adherence to safety regulations.
Situational analysis Industry description /trends The land transport infrastructure is dilapidated in most African countries and this creates a great opportunity for “further development” of air transport services throughout the continent (ADB, 2011). The deregulation of the airline has further created more favourable conditions for airline operators. Over the past 3 decades, much of the world has moved from a “strictly regulated air transport” to a more liberalised one (ADB, 2011). In addition to that, Civil Aviation in Africa has also embarked on the process of deregulation and this will involve gradual liberalisation of scheduled and non-scheduled inter-African air services, abolishing limits on the capacity and frequency of International air services, liberalising fares and granting traffic rights to airline operators (ADB, 2011).
This whole process will create a
favourable environment for the current and emerging airline operators. The Aviation industry environment is market (UJ, 2013).
highly competitive despite a relatively small
Competition from low cost carriers in particular continues
“unabated” (SAA, 2007). According to Nico Bezuidenut, CEO for Mango, innovation is crucial in the airline industry as competition intensifies and the industry matures.
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He further argues that operation in the airline industry will soon become cheaper but not sustainable (BDLive, 2013). Tourism plays a pivotal role in the success of the aviation industry both in Africa and internationally. According to BDLive (2013), tourism arrivals from Europe, America and Asia plays a crucial role in the recovery of civil aviation in Africa. Southern Africa is seen as “appealing” because of its excellent and diverse eco-tourism products, mainly game parks, historical and heritage sites. Globally, the aviation industry constitutes US$3.56 Billion which is approximately 5% of the world’s GDP. In the African context, the aviation industry drives economic growth, creates jobs and promotes tourism. Industry challenges The main challenge facing the airline industry is terrorism and aircraft hijackings. This situation places the industry in a situation whereby they need to invest in technologies that will offer aircraft security and give customers a peace of mind. High Fuel costs
are a challenge to the airline industry. According Walker (2012),
high fuel price is not the only challenge but the volatility of the price. He
further
argues that jet fuel has become not just the industry highest cost but the most unpredictable cost. Structural barriers such as high costs on buying aircrafts, operating licences and access to airports remain a challenge to the aviation industry. Challenges facing SAA Financial challenges Strong international and domestic competition facing SAA has a negative impact on its financial position.
There are doubts about the future of SAA as it struggles to
maintain profitability amid fuel costs and poor dollar exchange rate (Parliament of RSA, 2014). The high fuel costs coupled with the weakening rand against dollar erode route profitability. According to DPE (2016), jet fuel is the biggest cost to SAA contributing approximately 35% of the total operating costs. SAA is in a position where it is always begging for financial guarantees from the government for sustainability (Parliament of RSA, 2014). In admitting to the financial crisis, the then CEO Monwabisi Kalawe made the fact bare and mentioned that SAA was in a 10
deeper crisis than people realise (BDLive, 2013). He further highlighted that the airline survived on financial guarantees from Treasury. Currently, SAA’s balance sheet is weak and the cost position is too high (MarketLine, 2015). SAA has got huge staff costs and this has posed a lot of financial stress on the organisation. In recent years, management allowed staff numbers to grow to 11 000 from 9000 for the same revenue (BDLive, 2013). This increase in staff negatively impacts on the organisation’s expenditure and hence on profits. To add to this stress, SAA’s longhaul international routes are loss making. SAA long-haul international flights increased their loss from R 1.3 billion to R 1.6 billion in 2013/14 financial year (SAA, 2015). Rand volatility has got a negative impact on SAA’s financial performance. More than 60% of input costs are priced in foreign currency and foreign revenue represent 40% of gross income. This disparity when measured against international competitors places SAA’s business in a challenging competitive position (SAA, 2015). Ageing fleet The “geographical periphery” has created problems for SAA on its long distance international routes and this is because SAA has got an “ageing fleet” and these aircrafts are fuel inefficient. (McDonald, 2014). The ageing fleet is uneconomical in terms of fuel consumption and has often breakdowns. In addition to that, these planes are frequently “payload” restricted.
Moreover, SAA’s load factors for
international flights are poor and this further erodes its financial position. This poses a lot of challenges on SAA in terms of revenue generation. Reduced revenue inflow results in negative financial performance for SAA. Leadership challenges According to the Mail and Guardian (2015), 6 SAA Board members resigned in September 2012. Following that, 6 Directors did quit in October 2014. In December 2014, the responsibility of the troubled airline was transferred from the Minister of Public enterprises to Treasury. Subsequently, in November SAA suspended a couple of other executives (Mail and Guardian, 2015). This was followed by resignation by the organisation’s Chief Financial Officer. This is a reflection that there is a leadership crisis within SAA. Such a situation brings instability to the organisation and it is very difficult to achieve sustainable organisational performance under these circumstances. This leadership crisis has negatively impacted on the overall 11
performance of the organisation especially given that SAA is on a loss making spree. MarketLine (2015), argues that the recurring “regime changes” at SAA has destroyed management focus on costs and productivity. Cooperation and commitment in terms of setting up proper governance structure is crucial to addressing leadership issues at SAA. According to BDLive (2013), the success of any organisation depends on the quality of leadership and their ability to manage.
Macro-environmental Analysis In an effort to understand the challenges facing the National flag carrier, an analysis of the external factors was carried out. In addition to that, the impact of these external factors on South African Airways was evaluated. Political factors: The political environment has adverse effects to any business and the airline industry is no exception.
Political environment affects tourists’ inflows into the
country and this affects revenue inflow for the aviation industry. In addition to that, terrorist attacks and airline hijackings is a cause for concern for the airline industry. Tight security and screening technologies need to be put in place as a way of addressing this safety threat. The above mentioned crisis has a negative impact on passenger traffic as people get worried about their safety and this result in reduced revenue inflow, and hence reduced profits for the airline industry players. The inclusion of South Africa into the BRICS will foster rapid economic growth and SAA has got an opportunity to expand its awareness of being the gateway into Africa (SACAA, 2015). This will position it for improved performance and profitability. Government‘s call to keep aviation charges has a positive financial impact on SAA. Aviation charges are a huge cost to SAA and by keeping these charges low; the organisation’s revenue will be increased. Economic factors Increase in competition in domestic markets and the entrance of new players in the industry has created a huge need to increase safety audits among airline operators. In addition to that, the demand for aviation skills significantly increased. This situation puts SAA under financial pressure as it tries to up its safety standards. Moreover, skills shortage maybe a challenge that is likely to affect SAA if they do not invest Human Resources Development. 12
An increase oil price has resulted in increase in airline operating costs. Huge operating costs reduce revenue and erode profitability. The weakening rand has posed a lot of challenges in the airline industry. Firstly, the situation has contributed to losses on international routes for SAA. In addition to that, tourist movement in and out of the country has been affected and this has resulted in financial stress for the airline operators including then national flag carrier. Social factors Labour unions strikes in the public and private sector have created more harm than good. These strikes have got a negative impact on business operations and this result in reduced travel. These strikes have a negative financial impact on the airline industry. In some cases, if the airline employees are on strike, it means that some of the flights are cancelled while others are delayed. This situation tarnishes the image of the airline resulting reduced customer loyalty and hence affecting sales. The current high levels of illiteracy and unemployment in the country has posed a lot challenges on the aviation industry. The industry is under pressure to employ people who are not literate and this means that they have to train these people soon after recruitment and this comes at a cost. The recent xenophobic attacks in some parts of the country have reduced inflow of tourists and business people into the country and this reduction is a result of safety concerns. This social crisis impacted negatively on the financial performance of many regional airline operators including SAA. Technological factors Rapid advances in technology and aerospace technology require new skillsets and this involves training which comes at a cost. In addition to that, these changes in technology have resulted in the introduction of new regulations and guidelines which are difficult to implement. Environmental factors The outcry for the ozone layer depletion has caused a rift within the airline industry as governments have tightened regulations around carbon emissions. The airline industry is one of the largest contributors of carbon emissions accounting for approximately 30% of global carbon emissions (SAA, 2013). Aeroplanes emit carbon 13
dioxide and carbon monoxide, and these gases contribute to the depletion of the ozone layer resulting climate change Carbon tax charges have been increased by most governments and this impacts negatively on profits of the airlines as the charges push the operating costs high. Older planes with high emissions have been affected by the new regulations. Operators running these planes have been hugely affected since the planes have been restricted. In addition to that, emission penalties imposed are too ridiculous and this negatively affects the finances of airline industry players. In addition to the above factors, natural disasters such as earthquakes, heat waves and volcanoes pose a lot of challenges for the airline industry. Legal factors SAA needs to pay carbon taxes and adhere to health and safety standards. In addition to that, it has to remit tax to the South African revenue authority. All these factors are associated with costs and this has got a negative impact on SAA’s financial position. SAA’s competitors SAA is currently facing domestic competition from low cost airlines and these include Kulula.com and FlySaFair. It has to respond in order to remain competitive and maintain its market share. Low cost airlines have got newly minted professionals (Hough et al, 2011).
In additional to that, they offer their staff lucrative salary
packages to keep them motivated. Competition from these low cost airlines has got a negative impact on SAA’s revenues since these budget airlines offer lower fares which attract customers. FlySaFair is eroding SAA’s market share. FlySaFair competitive move has been built around low costs. Customers pay additional money on baggage, seat selection and meals. This kind of flexibility creates a favourable environment for customers. FlySaFair’s competitive position is a threat to South African Airways.
According to
Hough et al (2011), low cost competitions are dangerous in the sense that they “redefine the entire competitive landscape”. In addition to that, they “transform its value chain to reduce prices drastically”.
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Competitive analysis: Porter’s five forces
Source: Hough et al (2011). Bargaining power of buyers The airline industry is divided into distinct segments namely business, leisure and personal travellers. Customers have a bargaining power especially given increased variety of airlines available. In the light of this plethora of options, customers can decide to go for low fare airlines, quick service or quality service airlines. This situation puts airlines under pressure to offer value for money to their potential customers and this means offering best service at a low cost. SAA needs to offer best service at low cost if they are to win customers. Bargaining power of suppliers SAA imports jet fuel since local suppliers are expensive and this means that it has no control over the supplies as well as the price. In addition to that, the exchange rate which is unstable worsens the situation. It is difficult to get a stable price offer on the jet fuel and suppliers tend to use this loop hole to rip off buyers In terms of aircraft supply, there are 2 main suppliers of aeroplanes namely Boeing and Airbus, and these suppliers have a high bargaining power over SAA due to
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limited suppliers of aircrafts. In addition to that, airlines cannot easily switch suppliers and in most cases airlines have long time contracts with their supplies. Employees as suppliers of human resources make use of collective bargaining power through trade unions to increase their bargaining power. This puts SAA under pressure to pay high salaries which are not justifiable – there is little room for negotiations. This collective bargaining power puts SAA under financial stress due to increased staff costs. Rivalry due to existing competitors According to Tarry (2008), during the years of regulation, the extent of competition within the airline industry was largely based on non-price differentiation such as customer service differentiation, in-flight meals and in-flight entertainment. After the deregulation, the market competition forced airlines to come up with a more efficient way of using their fleets to “compete for customers” on the basis of “low cost”, “attractive service” and convenience (Tarry, 2008). This competition has shaken the industry resulting in frequent price changes and variation of prices depending on time of purchase of ticket and class of service. SAA is facing competition from low cost airlines such as Kulula.com and FlySaFair. This competition from low cost airlines puts SAA under pressure to respond and offer competitive prices while at the same time providing best service. Threat of substitute services Road, rail and ocean transport industries offer substitute services which are a threat to SAA cargo and the entire airline industry. The impact of these substitute service apply mostly to goods shipment, since it is cheaper to use rail or ocean transport in goods shipment. However in cases where customers are more concerned about quick service the impact is relatively low. Nowadays convenience, speed and safety are now key elements to customers. In addition to that, the fact that the road network in Africa is derelict, this offers a great opportunity for the aviation industry. Threats of new entrants This aspect is a low threat to SAA and the entire airline industry. The industry requires huge capital investment and without a strong customer base it is difficult to thrive in the industry. New entrants are vulnerable and their chances of them making substantial profits are slim. In addition to that, low switching costs between brands 16
make it possible for customers to go for well-known brands and leaving new entrants at risk. This scenario offers SAA a better competitive edge over new entrants. Key success factors According to Hough et al (2011), key success factors affect the ability of an organisation to prosper in the market place. The following success factors are instrumental in ensuring that SAA remains competitive in the airline industry. In addition to that, they create a favourable environment for SAA to grow its revenue and become sustainable.
Competent staff with aviation experience Talented workforce Skilled human capital Quick service Excellent customer service Extensive operational network Appropriate organisational structure Successful frequent flyer loyalty programme Cohesive turnaround aspiration Attitude change Support from Treasury Support from the Department of Public Enterprises
SWOT analysis As part of situational analysis, a review of the organisation was undertaken. This involved identifying the strengths and weaknesses as well as potential opportunities and threats that have an impact on the business performance. Strengths
Weakness
SAA contributes to the country’s
GDP Strong
safety
programmes
an
Labour strikes and issues Leadership challenges Poor management resulting
in 17
regulations Strong alliance with other airlines Widespread operational network SAA has a Cat 1 status in terms of
the 8 critical ICAO elements Frequent flyer loyalty programme Opportunities
negative profits SAA’s organisational performance is
ever fluctuating Fuel inefficient aircrafts Reliance on government guarantees
Threats
Growing global tourism industry Globalisation Airline industry in Africa
anticipated to grow rapidly Anticipated growth in the MRO
industry Student tourism market Creation of a National Aviation
is
Volatility in jet fuel prices Intense competition and
price
discounting Risk of epidemics Terrorism and plane hijackings Xenophobic attacks in South Africa Skills drain in technical areas
Academy to address innovation and
transformation Talent identification in the rural areas
Strengths a) Widespread operational network SAA has got an extensive operational network and runs a huge fleet base which enables it to offer services to key markets while allowing it to enhance its revenue base. According to MarketLine (2014), for local domestic flights, SAA operates 660 flights per week. Internationally, its network has links to all major continents through 10 direct routes, with daily flights from Johannesburg to London (MarketLine, 2014). b) Strong safety programmes an regulations SAA has got safety programmes and regulations in place to ensure competitiveness within the airline industry. Safety is critical when it comes to customer needs and an airline well known for strong safety initiatives tends to attract more customers. In addition to that, the above mentioned safety programmes and regulations make sure that SAA successfully implements the industry’s Safety Management Systems (SMS). c) Strong alliance with other airlines 18
SAA has got strong alliance with various international airlines. Currently SAA has got codes share agreements with 27 airlines across the world. This strong alliance enables SAA to offer increased flight frequencies and provide new standards of convenience and customer service, thereby earning it a competitive advantage over its rivals. d) Contribution to the GDP SAA contributes about 0.3 % of South Africa’s GDP which is approximately ZAR12, 4 Billion (MarketLine, 2013). In addition to that, SAA promotes job creation and tourism resulting in increased economic growth. Weaknesses a) Labour strikes SAAT a subsidiary of SAA is associated with labour strikes and these are influenced by the workers union. SA Transport and Allied Workers Union is a labour union which represent SAA’s employees. Labour strikes cause delays in flights and this creates inconvenience on the part of the customers. In addition to that, the reputation of the organisation is ruined.
b) Leadership challenges SAA is rocked by leadership challenges and scandals, and these are characterised by resignations and suspensions of Board members and senior managers. These leadership problems create instability within the organisation resulting management losing focus on core business. Company’s leadership has been involved in a number of scandals which have negatively impacted on the brand image. According to MarketLine (2013), former CEO, Monwabisi Kalawe was involved in a scandal where he defrauded customers by charging baggage wrapping.
c) Fuel inefficient aircraft 19
SAA has got fuel inefficient aircrafts and this leads to high fuel costs. As mentioned earlier on, fuel costs account for approximately 35% of the total operating costs. Having fuel inefficient planes further cause bleeding to the already troubled national flag carrier. According to Monwabisi Kalawe, the then CEO, SAA planes are fuel guzzlers and this result in huge fuel bills and hence reduced profits (Parliament of RSA, 2014). He further mentioned that their planes were manufactured during times when fuel was $40/ barrel and now it is at $110 per barrel, so fuel cost was not an issue. d) High debt burden SAA has got a substantial debt burden which limits its ability to plan while at the same time reducing its operating margin. Opportunities a) Student tourism market This market has potential for growth. According to Engineering News (2015), offering travellers one pass for use on all airlines in South Africa will attract customers. This means that through offering this one pass, passengers will end up visiting more destinations in the country and according boosting tourism. Sky Wise introduced the “new unlimited travel pass” on the Johannesburg –Cape Town, and this is working well (Engineering News, 2015). b) Creation of a National Aviation Academy This academy will be aimed at addressing innovation and transformation within the airline industry. Apparently, there is skills shortage within the aviation industry and by establishing the academy, a platform to address skills shortage as well foster innovation will be created. Talent identification in the rural areas can form part of the Academy’s responsibility and this will go a long way in addressing inequalities. c) Growth in the MRO industry There is anticipated growth in the MRO industry. SAAT a subsidiary of SAA operates in this industry. Growth in this industry will boost SAA’s financial muscle.
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Threats a) Xenophobic attacks and terrorism Safety and security are key elements customers consider when travelling. The recent xenophobic attacks and aircraft hijacking are a threat to SAA. They attacks have reduced the number of people travelling and this has resulted in reduced revenue. b) Outbreaks of epidemics Outbreaks of epidemics such as Ebola limit movement of people and this negatively affect SAA’s core business as passenger traffic is reduced.
Strategy analysis: Potential strategies There are limitless variations in the competitive strategies that organisations employ and this is because companies have different strategic approaches which suit their own circumstances and industry environment (Hough et al, 2011). In addition to that, companies have “custom –tailored” strategies and this makes it difficult for other companies in the same industry to employ such strategies (Hough et al, 2011). In trying to craft a strategy, managers need to know whether their market target is broad or narrow. Moreover, they need to check whether their competitive advantage is linked to low cost or product differentiation.
a) Low cost provider strategy This strategy focuses on striving to achieve lower overall costs than rivals. A low cost provider has to be appealing to a “broad spectrum of customers” and this is usually achieved by under-pricing rivals (Hough et al, 2011:149). b) Broad differentiation This strategy seeks to differentiate the company’s product offering from the rivals’ in such a way that appeals to a broad spectrum of buyers (Hough et al, 2011:149). c) Focused (market niche) strategy based on low costs
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The strategy focuses on making sure that the organisation concentrates on a narrow buyer segment and outsmarting rivals by having lower costs than rivals and hence the ability to serve niche members at a lower price (Hough et al,2011:149). d) Best cost provider strategy Giving customers more value for money by incorporating well to excellent product attributes at a lower cost than rivals is the main focus of the best cost provider strategy (Hough et al, 2011:149). The whole idea is to have the lowest costs and prices compared to rival offering products with comparable attributes. e) Focused (market niche) strategy based on differentiation The strategy ensures that an organisation concentrates on a narrow buyer segment and outcompeting rivals by offering niche members customised attributes that meet their tastes and requirements better than their rivals’ products (Hough et al, 2011:149).
Evaluation of potential strategies and recommendations Low cost provider strategy Currently SAA is making use of the low cost provider strategy on its subsidiary low cost airline Mango. Mango offers significantly lower costs than its rivals SA express, Kulula.com and FlySaFair while at the same time making sure essential service features are not compromised. In addition to that, Mango use lower cost base to underprice its rivals and attract “cost sensitive” buyers. Through this strategy application, Mango is able to maintain its present price and market share which is crucial for its sustainability. Capturing all possible economies of scale, operating facilities at full capacity and pursuing efforts boost sales volumes is the core focus of SAA’s low cost carrier. According to SAA (2015), Mango is doing well in terms of profit making with a 10% growth in profit in 2014. Given that this SAA’s low cost carrier is servicing the domestic routes and it is profit making, it is therefore recommended that SAA continues to apply low cost service provider on Mango operations. Continued application low cost leadership increases potential for the organisation to increase its market share as well as profitability. Moreover, increased profitability result in the accumulation of capital reserves which 22
can be used to pursue other strategic alternatives such as investing in strategic marketing.
To increase revenue inflow, it is recommended that Mango expand its
domestic operational network and offer services to routes that do not have budget airlines for example Johannesburg to East London route, Johannesburg to Mthatha, and Durban East London. However, there is a risk associated with continued application of low cost provider strategy and imitation is one of the risks. SAA’s low cost carrier is currently facing intense pressure for the new entrant, FlySaFair and there is a possibility that Mango’s market share can be eroded. FlySaFair has to some extent imitated the Mango model. It is there for recommended that Mango monitors its business model so that it does not only focus on cutting costs but also respond to the dynamism of the business environment.
Focused (market niche) strategy based on differentiation SAA is currently using the focused strategy based on differentiation through their business class service. The business class offers a unique service to customers and this includes entertainment, luxury seats, best customer service and expensive meals and beverages. These services are considered unique and there is a niche market prepared to pay a premium in exchange for these unique services. This kind of differentiation leads to brand loyalty and customer retention, and this shield SAA from competitive rivalry in the industry. In addition that, customer retention results in increased revenue inflow. However, there is a major risk associated with this differentiation strategy. Investing too much in differentiation is risky especially given that customers may end up sacrificing some of the unique features if the premium becomes too high. Given the current economic situation in South Africa, a few customers are prepared to go for the business class. Customers are now cost sensitive and every rand saving counts. This has created a challenge for SAA as few customers pay for the business class and this has resulted in reduced revenue inflow, and hence continued losses. SAA’s business class service offering relies on senior government officials who travel on business trips and with the recently announced austerity measures by Pravin Gordhan, SAA might find itself in a more financial stress as a result of these changes. 23
In the light of the above analysis it is therefore not recommended for SAA to continue to applying focused strategy based differentiation as this will continue to hammer the organisation in terms of profit making.
Best cost provider strategy SAA makes use of this strategy on its international routes. The main focus is around giving customers relatively value for money and this involves providing the best service at a relatively low cost. SAA has managed to provide attractive and world class service at a lower cost than its rivals on all long –haul international flights. SAA’s competitive advantage is based on lower cost than rivals and this is low cost coupled with upmarket attributes meant to attract customers.
Although SAA is
providing world class service to international travellers, these international routes have hugely impacted on SAA’s financial position. According SAA (2015), most SAA’s long –haul international routes are loss making. This loss is partly due to ageing planes which are fuel inefficient. High fuel costs also play a role in this loss making spree. In addition to that, the weakening rand has further increased SAA’s financial bleeding. With few tourists’ movement, SAA has suffered a big blow from international operations. In the light of the above analysis it not recommended that SAA continues applying best cost provider on international routes since it is clear that the routes are not profitable. Partnership with other airline industry players in these international routes might work well, just to share the costs and reduce losses. Promotion of tourism and loosening immigration regulations might create a favourable environment for people to travel and hence promoting the airline business. However, it is recommended that SAA apply this strategy on its domestic flights as competition intensifies. In order to be competitive and gain a bigger market share, SAA needs to provide value for money services. By so doing, it will attract more customers and increase its revenue inflows, and hence profitability and sustainability.
Broad differentiation An introduction of Mango by SAA has created some diversity and this has addressed people’s different preferences and tastes. SAA offers a combination of business and economy options to travellers and this flexibility creates a broad differentiation resulting in increased number of customers. However in trying to differentiate 24
products, organisations end up investing a lot of money in the process and this erodes profitability. In addition to that, it is difficult to understand customers’ behaviour and trends. As much as this strategy is working for SAA, application of this strategy is not recommended as it is a trial and error method which is unsustainable.
Focused (market niche) strategy based on low costs Currently SAA is not using this strategy. The strategy aims at securing competitive advantage by servicing buyers in target markets at a lower cost. The strategy is almost similar to low-cost leadership but the difference is in terms of the size of the buyer group which can be based on geographical uniqueness. Application of this strategy is not recommended since competition is intense and finding a unique buyer group may be challenging.
Recommendations: Strategic direction
An application of a low cost leadership strategy. SAA need to make sure that it introduces more low cost airlines on the domestic market. This means that they will offer low price with no frills. The low price will attract high number of passenger traffic resulting in increased revenue inflow for the airline. In addition
to that, this strategy will increase SAA’s competitiveness and profitability. Application of a best cost provider. Nowadays customers want value for money. SAA need to find innovative ways that can ensure that they provide best service at a low cost. This will involve cutting costs and increasing efficiency. This strategy has worked well for South West Airlines and Easy Jet. Fast turnaround approach for example 4 to 8 shifts daily on domestic routes may bring profitability instead of focusing on loss making international routes. This hybrid of low cost leadership and best cost provider is critical reviving the troubled airline.
Pruning marginal products and services As price competition stiffens and profit margins get squeezed, having many services might increase operating costs. Pruning service offering create a platform for cost saving while at the same time allowing for concentrating on routes whose profit margins are highest. In other words broad differentiation 25
strategy won’t work as price competition intensifies. SAA needs to prune its loss making long –haul international routes and focus on profit making domestic and regional routes and by so doing they concentrate on where they have a
competitive advantage. Improving value chain efficiency Reinventing the industry’s value chain might work well for SAA. They need to lower costs while at the same time providing the best service. This involves improving labour efficiency for example self –service check –in. In addition to
that, SAA can use home-based sales representatives to reduce overhead costs. Trimming costs Stiffening price competition gives companies extra incentives to drive costs down according to Hough et al (2011). SAA need to embark on a drive where they negotiate better prices with their suppliers while at the same time implementing tighter supply chain management practices. This will result is reduced
expenditure and hence increased net profit. Global strategy Expanding internationally into markets that are not saturated is an alternative approach for SAA to reduce its financial stress. According to Hough et al (2011), expanding to foreign markets where attractive growth potential still exists and competitive pressures are not so strong is crucial. SAA can give it try in China,
Argentina and India. Outsourcing SAA needs to outsource some of their support services to other service providers. According to Hough et al (2011), managers spend a lot time, energy and resources focusing on support activities instead of focusing on core primary activities of the business. Outsourcing administration activities might work out cheaper than doing it internally. Some of the advantages of outsourcing include increased response time to changing environment and reduced overhead costs.
Private partnership through bringing a private equity partner can address some
of the financial challenges affecting SAA. As a short term strategy, improving efficiency in operations by restructuring the operations through streamlining and focusing on routes which are competitive and profitable. Apparently SAA is making huge losses on long-haul international routes and by minimising these routes; its financial stress can be reduced.
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Marketing plan
Frequent flyer program
Frequent flyer program attracts customers and this result in increased revenue. It is recommended that SAA introduce a frequent flyer loyalty programme on their low cost carrier, Mango. This will give them a better competitive advantage over their rivals.
Tourism
Focus on tourism is crucial to SAA since there is direct correlation between the tourism industry and the airline industry. SAA has to be a market leader and link local tourism with the world. Finding a strategic partner in the tourism and hospitality industry will go a long way in finding solutions to financial challenges facing the national flag carrier. A combined marketing strategy that talks to both the airline and the tourism industries is essential.
Increasing sales Increasing sales to present customers can boost revenue inflow. In a mature market such as the airline industry, growth through grabbing customers away from rivals is difficult according to Hough et al (2011). It is therefore recommended that SAA expand sales to existing customers and this involves
sales promotions and provision of “ancillary services”. Use of travel agents minimises overhead costs. The fact that the agents get
commission means that they will work hard to find customers. Use of social networks can promote the brand Mobile apps brings convenience to customers Big data- SAA can reach potential customers through data mining Inflight entertainment needs to be upgraded and this will go a long way in providing excellent customer service
Human resources plan Human resources development Through application of human resources development as a strategic partner, SAA can be in a position to achieve its strategic objectives and improve its profitability and 27
sustainability.
This will involve training and development of staff, modernising
knowledge, upgrading skills, attitudes and perceptions in order to achieve operational excellence. A capacitated and motivated team offers excellent service which attracts more customers. In addition to that, HRD creates a favourable environment for creative thinking and innovation (Meyer, 2012) Having skilled and experienced employees improves overall performance of the organisation and hence reducing the vulnerability of failure for the organisation. In addition to that, through increased profits, the company can be in a position to reward its employees resulting in employee loyalty. Rewards brings about motivation and hence loyalty. This contributes to staff retention and reduces the costs of company since they won’t be a need to bring new inexperienced staff. Of course they are costs involved in developing human capacity but there more benefits in the long run. Human resource development brings about a situation where by organisations relies on internal resources and do away with outsourcing skills from the external environment. This brings about long term sustainability of the organisation. Application of HRD principles by SAA will create an enabling platform for the synthesis and application of knowledge for continued improvement. This innovation is critical especially given the current turbulent business environment SAA needs to adopt a paradigm shift as shown in the table below. Table1.0. Paradigm shift towards a knowledge organisation Traditional approach Production driven Functional (silo) Tangible Assets Top Down approach Incremental change Management (Source: Cribb, 2006).
Modern Approach Customer driven Process (Integrated) Intangible assets (Knowledge, skills, experience, talent) Bottom up approach Transformational change Leadership
According to Meyer (2012), provision of training and support to employees is crucial in attaining organisational efficiency and hence sustainability.
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Instead of hiring a lot of people, it is better to develop the current team and make them more productive. Investing in Human Resources Development has got long term returns. Increased efficiency and productivity from HRD will counteract current costs of human development. SAA need to reward employees for good performance so that they retain staff and offer best service to their customers. In addition to that, SAA needs a highly skilled and motivated CEO. According to Walker (2012), a highly skilled, respected and motivated CEO can improve employee productivity and even lower labour costs. A strong negotiator who knows the market can bring SAA back to profitability Establishing management performance standards These are crucial in improving employee engagement and operational excellence resulting in increased productivity and efficiency, and hence profitability.
Corporate governance SAA should make sure that execution of strategy is monitored and controlled by management and the board of directors. In addition to that, the board should ensure that executives are rewarded for success.
Establishment of a Cadet school The Parliament of RSA has recommended that there be an aviation cadet school. This school will be responsible for identifying and managing talent in the aviation industry. In addition to that, the school should spread recruitment and prioritise rural black people. According to the Parliament of RSA (2014), 80% of SAA’s pilots are white males. It has been noted that there are few female pilots and few black pilots (Parliament of RSA, 2014). The main objective of establishing the cadet school is to address issues of gender and race in the aviation industry.
Establishing management performance standards to improve employee
engagement and operational excellence Hiring for attitude SAA need to hire for attitude and train for skills. It is easier to train an employee for skills but it is difficult to change a person’s attitude.
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In summary, the whole idea about having a clearly defined human resources plan that talks to the organisation strategy is to increase productivity, retain staff and foster innovation for the benefit of the organisation.
Conclusion Given the current ever changing business environment, competitive strategies are needed for the success of businesses. Embracing innovation and technology is crucial in today’s business. Human resource development is crucial in achieving long term business objectives in the airline industry.
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