Public Agency External Analysis †Free Samples to Students

Question: Discuss about the Public Agency External Analysis. Answer: In todays competitive business world, corporations focus on analysing their strategic position by using different strategy development tools. These tools provide them information regarding both internal and external factors that influence their business and affect its profitability. This report will focus on the United States airline industry and evaluate its strategic position by using Porters five forces model. In past few years, the US airline industry is facing different economic and social challenges in order to maintain its profitability. This report will use Porter's five forces model to analyse the competitiveness of the US airline industry. The Porters five forces model assist senior-level executives in order to analyse the attractiveness or unattractiveness of an industry by determining its strengths and weaknesses (Dobbs, 2014). The objective of this report is to perform a competitive analysis of the US airline industry by using Porter's five forces framework. This report will evaluate the components along with advantage and disadvantage of using the five forces model. Further, the economic performance of the US airline industry will be discussed, and various strategies will be given in the report for improving airline profitability. The US airline industry includes players from both high to economic priced zones. The market leaders of the industry such as American, United and Delta Airlines are threatened by low-cost airlines such as Virgin America, Jet Blue, South West Airlines and AirTran Airways. Currently, the US airline industry is suffering due to the price war between airline companies which is damaging the profitability of the sector (Aguirregabiria and Ho, 2012). The new entrants in the industry focus on reducing air travel prices which have started a war between the organisations. In order to reduce flight tickets, the new entrants are using economic air routes, flying only specific types of aircraft and non-union workers. These strategies reduce operating costs of airline companies which enable them to reduce their ticket prices which are beneficial for customers (Daraban, 2012). On the other hand, growing popularity of online travelling sites such as Travelocity, Cleartrip, Expedia and Orbitz has inc reased the issues for airline companies because they provide customers facility to compare between different airline prices and choose the most affordable option for them (Dai, Lui and Serfes, 2014). According to the data of IATA (2018), the increase in jet fuel prices has a negative impact on the US airline industry (Figure 1). The rise in jet fuel prices increases airlines operating expenses due to which they have to hike their prices in order to compensate the loss. As per the case study, labour and fuel are two primary expenses of airline corporations which account for 58 percent of total expenses (labour 26 percent and fuel 32 percent). Bryan (2018) provided that in 2016, labour costs (22 percent) surpassed fuel expenses (21 percent) and it is expected to jump to 30.9 percent in 2018. Between late 2000s and early 2010s, a large number of mergers affect the US airline industry. In 2008, Delta merged with Northwest Airlines, and in 2010, United and Continental merged. Furthermore, American Airlines filed for bankruptcy in late 2012 (Treanor et al., 2014). However, along with risks, there are different opportunities in the US airline industry as well such as improved customer s ervice, effective baggage handling process and reduction in missing flights. Five Forces Analysis of US Airline Industry Michael Porter developed the five forces model which is strategy development tool which focuses on analysing competitive landscape of a business. This framework assists in determining competitive intensity of an industry which determines its strengths and weaknesses and helps companies in estimating the profitability of the industry (Vining, 2011). Generally, it is used by organisations for analysing attractiveness or unattractiveness of an industry. The five forces include competitive rivalry, the threat of substitutes, suppliers power, buyers power and the threat of new entrants. The threat of new entrants is minimal in the US airline industry because of a number of entry barriers. The operating costs are massive and the airlines have to comply with a number of governmental regulations which makes the process exceedingly complex (Zou et al., 2014). Therefore, due to high level of financial investment and regulation complicity, the threat of new entrants is high in the US airline industry. Customers have high bargaining power due to low switching costs, ease of booking tickets and effort required to change airlines. Passengers can use a mobile application to book airline tickets directly from their smartphones and select between best deals. A large number of third-party developers offers free or relatively cheap services to people through which they can check airline tickets from anywhere and compare them as well. As per Mellat Parast and Fini (2010), travellers have the option to evaluate different tickets prices along with offers provided by the airlines, and they can select the most suitable and affordable option for them. It creates pressure upon airlines, and they continuously focus on increasing quality of services and reducing flight tickets. Therefore, bargaining power of customers is high in the US airline industry. There are five aircraft manufacturers which include Airbus, Boeing, Bombardier, Embraer and Tupolev. However, Boeing and Airbus are the primary suppliers in the US airline industry, and there are a large number of companies that purchase aircraft from them (Thurber, 2012). It increases the bargaining power of suppliers in the US airline industry. Moreover, jet fuel prices are controlled by a limited number of suppliers that can easily hike its prices. Labour unions manage workers in the airline industry, and they create pressure on airlines to force their demands. Therefore, bargaining power of suppliers is high in the US airline industry. The threat of substitutes is low in the US airline industry because currently, the air travels in the fastest way of travelling across the world. The substitutions of airlines include travel include train, bur, and ships (Puller and Taylor, 2012). However, customers did not prefer these options because they are slower and relatively expensive than air travel. However, new advancement in transportation sector can introduce in substitute for air travel such as bullet trains and self-driving cars. The competitive rivalry in the US airline industry is substantially high with both local and international organisations operating to increase their customer base. Currently, the population of the US is 326 million and over 83.7 percent of the population lives in urban areas (Worldometers, 2018). It provides a significant opportunity to airline industries since airlines are the most preferred travel option of the US citizen. The primary demographic of airline companies includes people who fly to different states in the US and abroad for travelling or business purposes. The behaviour and psychology of the US citizens are to travel through the air because it is the most convenient and fastest option available. Large airlines such as United and Delta fly on similar routes, and their services are similar as well in the economic section. However, in premiums class sections, the services of each airline differentiate because they focus on different factors. Passengers can switch airlines without any additional costs which create pressure on airline firms. The popularity of online ticket booking websites such as Travelocity, Cleartrip, Expedia and Orbitz has increased competition between enterprises as well since customers can easily check and compare prices of different airlines and select the most affordable option (Choi, Lee and Olson, 2015). The introduction of a plethora of small airline organisations has increased the problems for big airlines along with competition in the industry. Therefore, the competitive rivalry is high in the US airline industry. Advantages and Disadvantages The five forces model is used by different organisations to analyse the attractiveness or unattractiveness of the business which assists companies in determining their profitability. Advantages The model assists corporations in understanding different external forces that shape an industry. It assists in evaluating the degree of competitiveness in industry and analysing different competitors in the market (Tavitiyaman, Qu and Zhang, 2011). It assists management in taking the decision whether they should enter into a market or not based on its attractiveness. The model helps management in analysing the profitability of a sector which assists them in making strategic business decisions. Disadvantages The model did not take into consideration different crucial factors that affect business such as liberalisation, globalisation and digitalisation. These factors are not included in the model which makes it inappropriate for modern organisations. The model is unable to provide a present picture of the industry because it analyses its attractiveness based on previous sources. The corporations can use the information collected by this model for implementing short-term strategies; however, it fails while developing long-term strategic business policies for a company (Lee, Kim and Park, 2012). While using Porter's five forces model, marketers collect and analyse the information of a specific organisation rather than the whole industry. The model is used for evaluating the attractiveness of an entire industry rather than a particular company which makes it unsuitable for corporations that rely on this model for creating strategic policies. Critiques argue that each force has different impact on a company and giving equal attention to each force is not right. Each force has a different influence on an organisation, however, the model considered them equal. It results in providing wrong information to a company which affects its strategic policies (Grundy, 2006). The Porter's five forces model highly relies on the sources from which the management collects the information. In case the sources are not reliable or old, then it did not provide a correct picture of the attractiveness or unattractiveness of the industry. There are a number of mistakes and factors which are not included in this model. For example, Samsung operates in mobile industry whereas Google operates in technology industry however Google develops android which is the operating system of each Samsung smartphones. However, Porter's five forces model did not take into consideration the importance of other industries that affect a firms operations (McLay, 2014). Economic Performance The profitability of the US airline industry is affected by a number of outside factors include the economic growth of the country. In case of recession, the purchasing power of customers reduces, and they prefer to choose affordable substitutes or lower flight options. On the other hand, in economic prosperity, the purchasing power of customers increase, and they are more likely to invest in luxuries such as premium air tickets. In 2017, the spending on air transport has increased from $737 billion to $776 billion. The industry has reported a growth of 5.3 percent in 2017 whereas it reported a decline of 2 percent in the previous year and it contributed 1 percent to the countrys economy (IATA, 2017) (Figure 3). The growth of airline industry is affected by a number of factors including economic condition in the country, high ticket prices, fluctuation in fuel prices and others. The increased competition the market also affects the industry since it is divided between many local as w ell as international corporations (Garrow, Hotle and Mumbower, 2012). The large brands are able to sustain the fluctuation in economic growth of the industry however it increases issues for small airlines. Identification of strategies for airline profitability The industry is not being able to perform at maximum potential, and its economic growth is affected by a number of factors. Following are different strategies that can be adopted by the US airline industry to increase its profitability and economic growth. The primary focus for companies operating in the US airline industry should be customer demands and how they can implement policies for addressing such requirements. Customers in the US airline industry have high bargaining power, and they can easily switch airlines. Therefore, corporations should focus on increasing brand loyalty in order to attract more customers. They should collect customer data and their purchasing habits and introduce a pricing strategy that suits their demands (Tan, 2016). For example, companies can address the issue of low fare prices by introducing better quality services in economy class and using an effective strategy for marketing such facilities. This will justify the extra prices spend by the customers on airlines tickets, and they are more likely to choose quality services over cheap air travelling experience. Therefore, customer demands should be the priority of customers, and the companies should focus on fulfilling their requirements. In order to improve overall customers travelling experience, airlines can implement small changes to address the issues faced by passengers while travelling in an airline. For example, implementing minimum seat width and legroom standards can make the travelling experience more enjoyable for customers, and they are more likely to pay extra for the comfortable journey. The companies should make flight contract and regulations more transparent and easier to understand for customers so that they are able to understand the procedure in case an issue occur such as rebooking, mechanical delays and lost luggage. These changes will result in improving customers services on an airline which will increase the number of loyal customers. The airlines can enhance their system in order to reduce inconvenience and invasion of privacy of customers. For example, companies can use open data and big data technology to analyse the purchasing pattern of customers and forecast their sales (McAfee et al., 2012). It will provide them necessary information to create business strategies that will assist them in increasing their profitability. The US airline industry is affected by an increase in low costs airlines which provide an affordable air travelling experience to customers. The companies are facing fierce competition, and they have to rely on innovative approach in order to generate and maintain a competitive advantage. The competition is high in the industry, and the bargaining power of buyers and suppliers is relatively high as well. The market share of giant players such as United and Delta is reduced by an increase in small airlines that offers affordable travelling experience to customers. Similarly, the introduction of online ticket booking services has also increased issues for the US-based airlines. In order to address these issues, companies should focus on improving their customer experience and overall services to make travelling experience more pleasurable for passengers. The corporations can also adopt the latest technologies in order to forecast customers demands and developing strategic policies. The se factors can result in increasing the profitability of airlines and sustain their future growth in the US airline industry. Conclusion In conclusion, a large number of big and small airlines operate in the US airline industry. The economic growth in the industry is influenced by a large number of low costs airlines and online based ticket booking services. Due to these factors, the industry is changing rapidly, and companies are required to change along with the sector. Based on Porter's five forces model, the competitive rivalry in the industry is high along with bargaining power of customers and suppliers. The threat of new entrants is low in the sector due to high investment requirements and complexity of regulations. The threat of substitutes is low as well due to lack of similar options. Various recommendations are given in the report for airlines to improve profitability such as adaptation of the latest technologies, improvement of customers services and prioritising customer demands. These policies can increase the profitability of organisations in the US airline industry and sustain their future growth. References Aguirregabiria, V. and Ho, C.Y. (2012) A dynamic oligopoly game of the US airline industry: Estimation and policy experiments.Journal of Econometrics,168(1), pp.156-173. Bryan, V. (2018) Analysis: Higher wages, fuel prices turn up cost pressure on airlines. [Online] Reuters. Available at: https://in.reuters.com/article/airlines-wages-inflation-analysis/analysis-higher-wages-fuel-prices-turn-up-cost-pressure-on-airlines-idINKCN1FY2E8 [Accessed 14 April 2018]. Choi, K., Lee, D. and Olson, D.L. (2015) Service quality and productivity in the US airline industry: a service quality-adjusted DEA model.Service Business,9(1), pp.137-160. Dai, M., Liu, Q. and Serfes, K. (2014) Is the effect of competition on price dispersion nonmonotonic? evidence from the us airline industry.Review of Economics and Statistics,96(1), pp.161-170. Daraban, B. (2012) The low cost carrier revolution continues: evidence from the US airline industry.Journal of Business Economics Research (Online),10(1), p.37. Dobbs, M. (2014) Guidelines for applying Porter's five forces framework: a set of industry analysis templates.Competitiveness Review,24(1), pp.32-45. Garrow, L.A., Hotle, S. and Mumbower, S. (2012) Assessment of product debundling trends in the US airline industry: Customer service and public policy implications.Transportation Research Part A: Policy and Practice,46(2), pp.255-268. Grundy, T. (2006) Rethinking and reinventing Michael Porter's five forces model.Strategic Change,15(5), pp.213-229. IATA. (2017) Economic performance of the Airline Industry. [PDF] IATA. Available at: https://www.iata.org/whatwedo/Documents/economics/IATA-Economic-Performance-of-the-Industry-mid-year-2017-report.pdf [Accessed 14 April 2018]. IATA. (2018) Jet Fuel Price Monitor. [Online] IATA. Available at: https://www.iata.org/publications/economics/fuel-monitor/Pages/index.aspx [Accessed 14 April 2018]. Joly, N. (2015) How to Competitive Analysis using Porters Five Forces Framework. [Online] Logiq3. Available at: https://www.logiq3.com/blog/how-to-competitive-analysis-using-porters-five-forces-framework [Accessed 14 April 2018]. Lee, H., Kim, M.S. and Park, Y. (2012) An analytic network process approach to operationalization of five forces model.Applied Mathematical Modelling,36(4), pp.1783-1795. McAfee, A., Brynjolfsson, E., Davenport, T.H., Patil, D.J. and Barton, D. (2012) Big data: the management revolution.Harvard business review,90(10), pp.60-68. McLay, A. (2014) Re-reengineering the dream: agility as competitive adaptability.International Journal of Agile Systems and Management,7(2), pp.101-115. Mellat Parast, M. and Fini, E.E.H. (2010) The effect of productivity and quality on profitability in US airline industry: an empirical investigation.Managing Service Quality: An International Journal,20(5), pp.458-474. Puller, S.L. and Taylor, L.M. (2012) Price discrimination by day-of-week of purchase: Evidence from the US airline industry.Journal of Economic Behavior Organization,84(3), pp.801-812. Tan, K.M. (2016) Incumbent Response to Entry by Low?Cost Carriers in the US Airline Industry.Southern Economic Journal,82(3), pp.874-892. Tavitiyaman, P., Qu, H. and Zhang, H.Q. (2011) The impact of industry force factors on resource competitive strategies and hotel performance.International Journal of Hospitality Management,30(3), pp.648-657. Thurber, M. (2012) At a Glance: The Major Aircraft Manufacturers. [Online] Bjtonline. Available at: https://www.bjtonline.com/business-jet-news/at-a-glance-the-major-aircraft-manufacturers [Accessed 14 April 2018]. Treanor, S.D., Simkins, B.J., Rogers, D.A. and Carter, D.A. (2014) Does operational and financial hedging reduce exposure? Evidence from the US airline industry.Financial Review,49(1), pp.149-172. Vining, A.R. (2011) Public agency external analysis using a modified five forces framework.International Public Management Journal,14(1), pp.63-105. Worldometers. (2018) U.S. Population. [Online] Worldometers. Available at: https://www.worldometers.info/world-population/us-population/ [Accessed 14 April 2018]. Zou, B., Elke, M., Hansen, M. and Kafle, N. (2014) Evaluating air carrier fuel efficiency in the US airline industry.Transportation Research Part A: Policy and Practice,59, pp.306-330.