MKTG 3307 Airline Simulation Weeks 1 - 6 Lecture Summaries PDF

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Summary

Lectures for first six weeks of MKTG 3307 airline simulation which was a half unit- lectures were held once a week for a 2 hour block - Taught by Paul Harrigan semester 1 of 2015 as the second part of the half unit MKTG 3307 running weeks 7-13. Lectures were given once a week for a 2 hour block, fin...

Description

MKTG%3307%Lecture%1%Wednesday%25/02/15%! Introduction*and*Air*Asia*Case* • • • • •

The!Quiz!is!part!of!the!5%!participation4!must!read!Airline!Student!manual!first4!it!has!10!questions4!multi! choice!and!true!false!questions4!see!Glossary!of!Terms!on!LMS! Graded!on!performance!in!your!industry!(versus!other!teams)!at!end!of!6!rounds:!profitability;!sales!growth;! performance!ratio!(return!on!equity!and!return!on!assets)! No!textbook!for!this!unit! Start!off!with!2!airlines! Assignment!1:!naming!you!airline! → What’s!your!values!and!mission! → Should!be!consistent!with!your!strategic!goals!and!decisions!you!will!make!

Airline!learning!objectives! • Airline!provides!the!opportunity!to:! → Experience!strategy!formulation!and!implementation!in!a!dynamic!environment! → Learn!about!group!and!organisational!processes! → Understand!the!financial!implications!of!operations,!marketing!and!management!decisions! → Improve!decision!making!skills!under!ambiguous!circumstances!and!time!pressure! → Experience!the!fun!and!challenges!of!running!a!business! • Strategy!formulation:! → How!will!you!meet!your!objectives?! → Requires!that!you!understand!your!company!and!environment! → Set!measurable!goals!and!objectives!that!are!aligned!with!the!vision!and!mission!of!the!organisation!

! Importance*of*Strategic*Alignment* • Strategic!decisions:!! → Price!positioning!(discount,!normal,!luxury)! → Route!expansion/contraction4! → Fleet!acquisitions/financing4!should!you!own!all!the!planes!or!should!they!lease!them!out! → Business!definition4!“Who!are!we?”! • Operational!decisions! → Price!point!(of!actual!ticket),!service!levels!(food!provided,!entertainment,!blankets),!marketing! decisions!(budget!allocated!to!it4!marketing!channels),!fuel,!maintenance,!compensation,!corporate,! (who!is!the!market!segment!you!are!targeting)!etc.! → In!alignment!with!strategic!choice! → “Given!who!we!are,!how!do!we!do!it!better”! • To!succeed!in!Airline,!you!must!do!both!well! Decisions*Menu* • In!this!computer!simulation,!you!will!make!decisions!in!the!areas!of! → Fares! → Marketing! → Compensation! → Fleet!

→ → → →

Supply!side4!costs,!opportunity!cost,!economics!of!scale!and!scope! Demand!side4!demand,!price!and!income!elasticity’s! Market!structure4!monopoly,!imperfect!competition! Industry!structure4!configuration!of!firms!

Cost*analysis* • Opportunity*cost:*the!sacrifice!of!alternatives!foregone!in!producing!goods!or!services! • Relevant*costs:*costs!directly!affected!by!and!changed!by!a!decision! • Cost*structure:*! → Technical!conditions!of!production!in!markets! → Fixed!costs:!do!not!vary!with!output!(buildings,!machinery)! → Variable!costs:!very!with!output!(labour,!raw!materials)! → Total!cost:!Fixed!cost!+!variable!cost! → Average!total!cost:!total!cost/!total!output! → Average!fixed!cost:!fixed!cost/!total!output! • Marginal*cost:*the!cost!of!producing!one!extra!unit!of!output! Cost*Structure* • Fixed*costs=*airport!fees!to!park!still!have!to!pay!no!matter!how!many!passengers!you!have,!paying!the!lease! on!the!plane! • Variable*costs=*fuel!cost,!wages! • Total!revenue!should!always!be!in!the!green4!total!revenue!over!total!costs4!attempt!to!do!this!through! i. Stimulating!growth!to!increase!revenue! ii. Cutting!costs!

! Economies*of*scale* • If!you!scale!operations!(make!it!bigger)!you!can!make!use!of!your!fixed!costs!more!efficiently!as!it!reduces! your!average!cost!of!operation!(e.g.!you!can!use!a!full!hanger4!rented!space4!can’t!reduce!to!half!a!hanger!if! you!wanted!to!cut!costs)! • If!you!buy!lots!of!the!same!craft!you!only!need!to!high!one!maintenance!crew! Sources* • The!division!of!labour! • The!cube!law! • Economies!of!massed!resources! • Firm4level!economies!of!scale! • Administrative!economies! • Financial!economies! • Marketing!economies! * Limits* • Diseconomies!of!scale!in!distribution!

Achieving*competitive*advantage*through*a*focus*strategy*

* Concluding*remarks* • The!degree!to!which!the!environment!constrains!an!organization!is!contested.! • Markets!are!perhaps!the!most!constraining!element!of!the!environment.! • Profits!are!determined!by!the!relationship!between!revenue!and!costs!so!careful!cost!and!demand!analysis! is!necessary.! • Economies!of!scale!are!critical!determinants!of!costs.! • Price!elasticities!are!critical!determinants!of!demand.! • Market!structure!impacts!on!both!economies!of!scale!and!price!elasticities.! • The!strategist!seeks!to!differentiate!between!those!economic!forces!that!are!irresistible!and!those!that!can! be!conditioned!by!the!appropriate!choice!of!strategy.! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! !

MKTG%3307%Lecture%4%Wednesday%18.03.15! Lan*Airlines*vs.*Southwest*Airlines* Lan*Airlines*(Lan)* • Leading!full!service!airline!in!Latin!America!(Chile)! → Latin!American!countries,!U.S.,!Europe!and!Australia!and!NZ! • Passenger,!cargo!and!additional!freight!services!to!56!passenger!destinations! • Financials!in!2005! → Revenues!of!$2.5Billion! o 58.3%!passenger! o 36.3%!cargo!operations! o 5.4%!other!services! → Net!income!of!$146.6M! → Market!cap!of!$2B! * Southwest*Airlines*(Southwest)* • Largest!Domestic!carrier!in!the!US!as!of!2005! • P2P,!low!fare!service!to!374!non!stop!city!pairs! • Financials!in!2005! → Revenues!of!$7.6B:!! o 96%!passenger! o Freight!and!other!services! → Net!income!of!$548M! → Market!cap!of!$13.2B! ! • How!does!Lan!Airlines!business!model!create!and!capture!value?! • How!foes!Southwest’s!business!model!create!and!capture!value?! • How!would!you!compare!the!two!models?!Which!one!is!the!best?! Lans*Model*(Decisions)* • Invest!both!in!passenger!and!cargo!services! • Price!discrimination:!three!classes!of!travel!and!cargo! • Short!and!long!haul!national!and!international!routes:!OneWorld!Alliance!member! • Non4standardized!fleets! • Distribution!and!sales:!67%!travel!agents,!33%!direct!sales! • Marketing!and!branding:!LanPass!frequent!flyer,!Targeted!promotions! • Many!flight!attendants:!training!and!compensation.! * Results* • High!air!craft!utilization! • Low!cost/!available!seat!kilometer! • High!quality!services! • Large!volume! • Large!network!(scale!economies)! • Barriers!to!entry/monopoly!power! • High!Willingness!to!Pay!(WTP)!(profit)! Southwest*Model*(Decisions)* • Low!cost!philosophy:!no!frills;!no!commission! • Passengers!treated!equally! • Short!and!mid!haul!national!flights! • Standardized!fleet! • Distribution!and!sales! → 65%!website;!six!reservation!centres!

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→ 93%!ticketless!travel! Marketing!and!branding! → $173M!on!advertising!and!promotion!activities! → Frequent!flyer!(companion!pass)! High!powered!incentives! → Profit!sharing;!stock!options! Fun!culture4!makes!flying!a!unique!experience!

* Results* • High!aircraft!utilization! • Low!cost! • Large!volume! • Profit! • Fun!working!environment! • Motivated!flight.! Lan*versus*Southwest* General*size* • Southwest!flies!nearly!65!billion!more!ASMs!per!year!than!Lan! • Southwest!has!65!million!more!passengers!boarded! • Southwest!has!18,000!more!employees! • Southwest!is!likely!larger!because!it!is!in!the!U.S.!(key!“choice”!in!its!business!model)! • Southwest!has!scale!economies! * Load*Factor* • Lan!beats!Southwest!on!the!passenger!load!factor! • Likely!has!to!do!with!flexibility,!which!allows!Lan!to!re4schedule!and!cancel!flights!if!passenger!load!factor! insufficient.! * Fuel*Cost*per*gallon* • Southwest!paid!55!cents!less!per!gallon!(39%!less)!than!Lan! • May!be!due!to!timing!and!quantity!of!purchase!or!better!hedging.! ! Employee*measures* • Southwest!exceeds!Lan!by!33.5%!on!Revenue!per!Employee! • Suprising!given!Southwest!is!low4cost!concept! • Lan!has!more!employees!relative!to!its!revenue,!and!wages!and!benefits!much!lower!than!Southwest’s!per! employee! → $214,610!for!Lan! → $85,159!for!Southwest! * Passengers/Employees** * Depreciation* • Lans!depreciation!is!lower!due!to!it’s!older!fleet! • However!it!suggests!that!Lan!may!have!lower!bargaining!power!with!Boeing/Airbus,!making!it!more!difficult! to!invest!in!new!planes! ! Aircraft*rentals* • Lan’s!relative!aircraft!rental!is!higher!than!Southwest’s! • 63%!for!Lan!vs.!21%!for!Southwest! * Maintenance* • Lan!beats!out!Southwest! • Surprising!given!Lan’s!older!fleet! • Could!be!due!to!wage!differences!in!the!two!countries!

Passenger*services/cargo*services/*commission*to*agents* • Lan=!cargo!services!and!commission!to!agents! • Southwest!Airline=!passenger!services! * Willingness*to*pay*(Lan*passenger*service)* • WTP!is!high!for!Lan!because!of!great!service,!extensive!route!network!and!well!established!frequent!flyer! program! • Lan!aims!to!address!segment!for!medium!to!high!income!Latin!Americans!who!travel!to!the!US!and!Europe! for!business!and/or!leisure! • Lan!aims!to!provide!better!service!than!US!and!European!airlines!to!attract!international!travelers!who!may! she!away!from!foreign!airlines! * Willingness*to*pay*(Southwest)* • WTP!for!Southwest!is!lower!than!that!for!Lan!or!full!service!airlines! • Price!elasticity!of!demand!in!“no!frills”!market!segment!is!much!greater! • Southwest’s!competitive!advantage!is!explained!by!its!very!low!cost! → Homogenous!fleet! → Minimal!onboard!service! → No!seating!arrangements!(no!preferential!or!separated!seating)! → Quick!turnaround!time! → Fuel!hedging! → Productive!employees! ! ! Lan! Southwest! Average!Revenue/Passenger! $183.33! $93.68! Operating!Cost/!Passenger! $172.97! $83.56! Margin!per!passenger! $10.36! $10.12! • Illustrates!how!two!radically!different!ways!to!compete!in!industry!can!lead!to!enviable!performance.! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! !

MKTG%3307%Lecture%54!Mid$Term$Exam! • • •

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Wednesday!April!1!547pm!in!Social!Sciences!Lecture!Theatre!sitting!by!tutorial!sections! Format:!4!short!answer!questions,!2!hr!exam! → Two!questions!worth!2.5%,!two!questions!worth!5%!each.!! Preparation:!playing!airline!simulation!game,!marketing!mix!strategy! → Understand!the!decisions!you!have!made! → Marketing!mix!strategy4!how!you!went!about!playing!the!game!from!a!strategic!point!of!view:!the!4! Ps:!product,!placement,!promotion!and!price4!think!about!how!your!strategies!fell!under!these!four! Ps.!!

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MKTG%3307$Lecture$6$Wednesday! Question!and!Answer!session4!awards!for!airline!performance/!mid!semester!exam! !

The*business*model*

! The*2G*business*model*

! Achieving*a*sustainable*and*defensible*strategic*position* • The!Five!Forces!model!indicates!the!attractiveness!of!the!industry! • Sustainability!involves!protection!of!cash!flows!from!responses!of!competitors!and!new!entrants! • Isolating!mechanisms!limit!the!extent!to!which!competitive!advantage!can!be!neutralized!or!duplicated! → Legal!restrictions! → Superior!access!to!inputs!or!to!customers! → Intangible!barriers! • Early!mover!advantages!promote!scale!economies!and!market!share!creating!entry!barrier!for!latecomers! Concluding*remarks* • Strategies!can!be!described!as!a!set!of!long!term!goals!and!businesses!scope,!sources!of!competitive! advantage!and!the!logic!of!exploiting!this! • Strategy!thus!concerns!the!transformation!of!strategic!position!to!competitive!advantage!

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With!its!emphasis!on!the!specific!configuration!of!activities,!value!chain!analysis!is!a!valuable!tool!in! analyzing!competitive!advantage! Strategic!performance!can!be!usefully!assessed!in!terms!of!essential!aspects,!such!as!key!success!factors.! Establishing!and!defending!strategic!position!in!the!marketplace!requires!an!understanding!of! → Economic!drivers!of!the!firm! → Cost!position! → Approach!to!differentiation! → Ability!to!exploit!economies!of!scale!and!scope! Firms!can!analyze!their!position!in!terms!of!! → Strategic!market!segments!(demand!side)! → Strategic!groups!(supply!side)! These!underpin!pricing,!value!and!the!sustainability!of!value!over!time! A!business!model!provides!the!means!to!turn!competitive!strategy!into!sustained!cash!flow.!

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! Reducing*price*elasticity*exposure* • Segmentation:*different!offerings!to!distinct!consumer!groups!within!overall!demand! • Derived*demand:*demand!ties!to!the!purchase!of!another!product!(e.g.!bricks!for!houses,!film!for!cameras)! • Producer*goods:*related!to!derived!demand!but!also!more!expert! • Perishable*goods:*less!volatile!demand!than!for!durable!goods! Markets*and*competition* • Perfect!competition:!No!way!to!make!any!profits!in!a!perfect!competition4!the!market!determines!the!price4! competitors!know!what!one!another!is!doing! • Simulation!is!a!monopolistic!or!imperfect!competition:!degree!of!differentiation!between!the!services4!firms! yield!some!type!of!power!in!determining!price4!do!not!know!moves!of!competition!

! Analysis*of*industries*and*competition* • Few!markets!are!‘perfect’! • Firms!seek!specific!knowledge!and!unique!assets!to!offer!distinctive!products!at!a!premium!price!

Thus!firms!seek!imperfect!markets!and!often!have!a!joint!interest!with!other!firms!in!creating!collective! imperfections.! • Two!level!competition:! → Marketplace!–!customers!compare!rival!offerings!and!prices!are!set! → Investment!–!firms!accumulate!specific!assets!to!produce!distinctive!offerings! • Industry!analysis!identifies!the!common!assets,!resources!and!capabilities!that!set!the!context!for!firms’! efforts!to!create!distinctive!positions.! •

Porters*five*forces*framework*

! 1. Threat*of*entry! → Above4average!profits!attract!investors!to!enter!an!industry.!! → Entry!barriers!4!where!a!potential!entrant!has!(fixed!and!variable)!costs!of!production!higher!than! the!incumbents!it!faces.!! → Blockade!4!where!other!reasons!prevent!entry!(e.g.!access!to!technology!or!distribution).!! 2. Power*of*suppliers*and*buyers! → Limited!suppliers! → Switching!costs4!accustomed!to!using!a!particular!supplier! → No!substitution!possibilities! 3. Threat*of*substitutes! → The!potential!for!new!products!to!displace!the!existing!value!proposition!in!an!industry! 4. Competitive*rivalry! → More!competitors!and!more!commodity4like!products! → Supply!in!excess!of!demand!

Strategy*as*imperfections*

! Imperfect*markets*and*competitive*position*

! !

Porters*Generic*strategies*

! • • 1.

2.

3. 4.

Your!airline!is!likely!to!be!a!combination!of!some!of!these!strategies! The!essence!of!strategy!is!the!creation!of!space!within!which!discrete!and!distinctive!actions!can!secure! improved!positioning!within!markets! Cost*Leadership8*lowest!cost!producer!in!a!industry! → Proprietary!access!to!cheap!inputs,!technology!or!learning! → Associated!with!market!share!and!economies!of!scale! → Standardized!processes!and!cost!control!important! Differentiation8*enhanced!value!to!consumer! → Premium!pricing! → Product!innovation!or!marketing! → Expert4based!innovation!important! Focus8*exploits!cost!or!product!preferences!in!some!part!of!the!market! → Market!segmentation! Danger*area8*stuck!in!the!middle!

Criticisms*of*Porter’s*generic*strategies* • Cost!leadership!and!differentiation!can!be!combined!profitably! → Cost!leadership!is!not!necessarily!price!leadership! → Differentiation!does!not!necessarily!involve!premium!pricing! • Overly!simplistic;!insufficient!market!orientation!or!account!of!government!actions! → Yet!generic!strategies!are!designed!to!be!simplifying,!expressing!underlying!economic!forces!

Routes*to*competitive*advantage*

! Is*more*than*one*generic*strategy*possible*

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Achieving*competitive*advantage*through*differentiation*

! Achieving*competitive*advantage*through*a*cost*leadership*strategy*

!

Achieving*competitive*advantage*through*a*focus*strategy*

* Concluding*remarks* • The!degree!to!which!the!environment!constrains!an!organization!is!contested.! • Markets!are!perhaps!the!most!constraining!element!of!the!environment.! • Profits!are!determined!by!the!relationship!between!revenue!and!costs!so!careful!cost!and!demand!analysis! is!necessary.! • Economies!of!scale!are!critical!determinants!of!costs.! • Price!elasticities!are!critical!determinants!of!demand.! • Market!structure!impacts!on!both!economies!of!scale!and!price!elasticities.! • The!strategist!seeks!to!differentiate!between!those!economic!forces!that!are!irresistible!and!those!that!can! be!conditioned!by!the!appropriate!choice!of!strategy.! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! !

MKTG%3307%Lecture%3%Wednesday%11.03.15! Special*Incident8*Channels*of*Distribution* 1. Maintain!your!phone!banks!and!travel!agent!relationships! → 4%!discount!on!electronic!tickets! 2. Join!several!Web!consortiums!(several!independent!sites).!Maintain!your!telephone!access! → No!upfront!cost! → 3%!commission! → Discount!2!to!5%!to!customers! 3. Open!a!Web!Site!of!your!own!for!ticket!sales.!Maintain!telephone!bank! → One4time!$20,000!start!up!cost! → No!commission! → Discount!245%!to!customers! 4. Contract!with!owners!of!a!large,!nationally!known!site!to!sell!tickets! → 5%!commissions! → No!front!end!cost! → Discount!245%!to!customers! • What!problem(s)!might!you!face!in!changing!the!way!you!currently!sell!tickets?! • What!will!be!the!advantage(s)!of!making!a!change?!What!will!be!the!disadvantages(s)?! • How!have!you!personally!purchased!flight!tickets?!W!as!it!convenient!or!inconvenient?! My*Strategy*in*Round*1* • Choose!what!level!fare!to!start!with!(discount,!regular,!luxury)! • Choose!aircraft!to!acquire!which!has!from!30437!seats!that!is!large!enough!to!cover!longer!routes.!Lease!has! no!financing!burden!in!current!quarter.! • Choose!markets!to!fly!new!aircraft!to:! → Add!one!or!more!flights!to!Type!C!(340!miles)!market! → 3!flights!to!competitor’s!monopoly!market! → 1!flight!to!Type!A!market!(600!miles)! • Increase!your!fare!and!see!what!the!competition!is!going!to!do! • Increase!advertising!and!promotion!somewhat!to!support!your!new!market!activities! • Take!a!short4term!loan!to!ensure!enough!cash!to!increase!budgets! • Allocate!budget!funds!to!support!the!new!fleet/markets,!and!other!organizational!activities.! Outline* • Describing!strategy! • The!strategy!cycle! • Strategic!market!segments! • Value!creation!and!value!analysis! • Strategic!group!analysis! • Strategy!making!in!practice! • The!Business!model! Describing*strategy* • How!would!you!recognize!a!strategy!if!you!saw!one! a. A!clear!set!of!long4term!goals:!Where!are!we!going?! b. The!scope!of!the!business:!what!are!we!going!to!do?! c. Competitive!advantage:!how!are!we!going!to!do!it?! d. The!strategic!logic:!how!do!we!know!it!will!work?! What*is*the*competitive*advantage* • Delivering!superior!value!to!customers!and!in!doing!so!earning!an!above!average!return!for!the!company!and! its!stakeholders! • Requires!firm!to!be!sustainably!different!from!its!competitors!in!a!way!that!customers!are!prepared!to! purchase!at!a!sufficiently!high!price.!

From*strategic*position*to*competitive*advantage* • Look!for!potential!gaps!in!the!market:!look!at!demand! • The!cycle!maps!the!interaction!between!internal!resources!and!capabilities!and!the!external!environment.!If! competitive!advantage!is!achieved,!it!translates!into!corporate!value!which!can!then!be!reinvested.!

! The*Value*chain*

!! The*value*chain*and*cost*analysis* 1. Define!the!value!chain!in!terms!of!sources!of!competitive!advantage! 2. Establish!the!relative!important!of!each!activity!in!terms!of!total!product!cost! 3. Compare!costs!by!activity!and!against!competitors! 4. Identify!cost!drivers! 5. Identify!linkage!between!activities!! 6. Identify!opportunities!for!reducing!costs! Strategic*market*segments* • Groups!of!customers!that!the!firm!wants!to!appeal!to!are!called!strategic!market!segments! • The!key!questions!are:! → How!much!is!the!customer!prepared!to!pay?! → Can!the!firm!provide!value!to!the!customer!and!the!firm!at!that!price?! • Increase!promotional!budget! M...