Strategic Options of Non-profit and For-profit Organisations in the German General Aviation Industry

Table of Contents

1. Introduction
1.1 Research Objectives
1.2 Aim of the Study
1.3 Structure

2. Literature Review
2.1 Coexistence of NPO and FPO in Same Market Segments
2.1.1 Definition FPO and NPO
2.1.2 Coexistence of NPOs and FPOs
2.2 Strategic Options
2.2.1 Definition of Strategy
2.2.2 Strategic Planning
2.3 External and Internal Factors
2.3.1 Environmental Analysis with PESTELTheory
2.3.2 Competitive Analysis with Porter’s Five Forces
2.4 Empical Studies
2.5 Conclusion

3. Research Questions and Propositions

4. Methodology
4.1 Research Method
4.1.1 Goodness Criteria
4.2 Data Analysis Using Factor and Regression Analysis
4.3 Population and Data Collection Approach
4.4 Designing the Questionnaire

5. Research Results
5.1 Information about the Sample
5.2 Porter’s Generic Strategies
5.3 Porter’s Five Forces
5.4 PESTEL Analysis
5.5 Ansoff’s Product Market Matrix
5.6 Performance Measures
5.7 Regression Analysis
5.7.1 Porter Five Forces on Porter Strategies
5.7.2 Porter Five Forces on Ansoff
5.7.3 PESTEL on Porter Generic Strategies
5.7.4 PESTEL on Ansoff
5.7.5 Porter Generic Strategies on Performance
5.7.6 Ansoff on Performance

6. Discussion

7. Conclusion and Recommendations

8. Limitations on Future Research

9. Personal Development

10. Reference List

11. Bibliography

Appendix 1 Results

Appendix 2 Test Persons

Appendix 3 Questionnaire

List of Figures

Figure 1: Aviation Categories

Figure 2: Time Series of number of registered aircrafts in Germany

Figure 3: Time Series of number of members in German aviation clubs

Figure 4: Major Types of Legal Institutions

Figure 5: Ansoff’s Growth Matrix

Figure 6: Layers of the business environment

Figure 7: Porter’s Five Forces

Figure 8: PESTEL with results

Figure 9: Ansoff Matrix with results

List of Tables

Table 1: Regression of Porter Five Forces on Porter Strategies

Table 2: Regression Porter Five Forces on Ansoff

Table 3: Regression PESTEL on Porter Generic Strategies

Table 4: Regression PESTEL on Ansoff

Table 5: Survey results General Information (Q4)

Table 6: Survey results on education (Q3)

Table 7: Factor Cost Leadership

Table 8: Survey results on charter (Q2)

Table 9: Factor Differentiation

Table 10: Factor Focus

Table 11: Factor Buyer Power

Table 12: Factor Substitutes

Table 13: Factor Market Entrants

Table 14: Factor Competitive Rivalry

Table 15: Factor Supplier Power

Table 16: Porter’s Five Forces with Results

Table 17: Factor Political/Legal

Table 18: Factor Economic

Table 19: Factor Social

Table 20: Factor Environmental

Table 21: Market Penetration

Table 22: Product Development

Table 23: Diversification

Table 24: Performance

List of Abbreviations

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1. Introduction

For some people, flying (with) airplanes is a necessity of business life but for others flying is a hobby. Thus, the purposes of flying can be quite different. As a result, organisational approaches in the aviation market can be different according to the varying aviation purposes, i.e. training schools or charter operators. Regardless of the organisation approach, the objective of all is to educate pilots and charter aircrafts.

So far, research work is scarce on the selection of growth strategies by different aviation operation forms. This paper provides an overview of available growth strategies for different organisation forms in pilot education and aircraft charter within the area of the general aviation (GA)^[1] as outlined in Figure 1 and what drives the selection of a specific growth strategy. As there is hardly any research in this regard, the study is explorative in nature. In the following sections, the paper will focus solely on the general aviation industry as this is an appropriate example for the coexistence of non-profit organisations (NPO) and for-profit organisations (FPO) offering partly equal services in one industry.

Figure 1 : Aviation Categories

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The organisational approaches in the aviation industry are either in the form of non-profit or for-profit organisations. Therefore, this paper additionally emphasises on the strategic options NPO forms choose for interacting in mixed industry structures competing against FPO.

1.1 Research Objectives

Powell and Steinberg (2006:2) have generally described that “there are industries where both organisational forms (NPO and FPO) offer their products and services. An important direction for future research is to examine this interaction between NPO and FPO coexisting in an industry.” Markets in which NPOs and FPOs coexist are called mixed markets (Marwell and McInerney, 2004). Both organisation forms imply different advantages for the consumers, as they associate themselves to diverse business prerequisites, and therefore choose different growth strategies. Brown and Slivinski (2006:154-155) explicitly call for research with special regards to competition particularly in industries where NPOs and FPOs compete, stating that the “behavioural modelling of competition in mixed markets is a recent development, and empirical work designed to sort out which models are most relevant will add to our understanding of markets in which multiple organisation forms coexist” (Brown and Slivinski, 2006:155).

This thesis concentrates on the German general aviation industry. In Germany, there are 19,009 registered airplanes (Luftfahrt-Bundesamt, 2009) as shown in Figure 3 and around 63,746 issued private pilot licenses^[2] (Luftfahrt-Bundesamt, 2009). Out of 63,746 registered pilots, around 44,598 of the private pilots are organised in around 900 incorporated clubs (Deutscher Aero Club e.V., 2010) that are set-up as NPOs. As the head organisation of German aviation clubs, the Deutscher Aero Club e.V. (German Aero Club Association) reports an annual decrease in number of members of CAGR^[3] 2.0 % since 1999 as outlined in Figure 3. This decline is a threat to all NPOs in the general aviation industry and shows that it is crucial to choose the right strategy in order to survive. Hence, it is of utmost importance to investigate which strategies NPOs should choose and what factors influence the selection process.

Figure 2 : Time Series of number of registered aircrafts in Germany

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Source: DAeC (2010)

Figure 3 : Time Series of number of members in German aviation clubs

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Source: DAeC (2010)

It is widely acknowledged (e.g. Mazzarol and Soutar 2008, Nicholls et al. 1995) that organisations following a coherent strategy, which is based on a thorough analysis of the environment, industry and competitive landscape, are more successful than organisations, which do not develop a focused and environment-oriented strategy. Despite this understanding, organisations still fail to develop a coherent strategy. For example, Mazzarol and Soutar (2008) could show for the educational service industry that educational organisations, which do not derive a clear strategy, perform worse in the long-run than companies in the same circumstances. This demonstrates the utmost necessity to analyse and evaluate the different external layers of a company, namely, the macro and the micro environment (Ansoff, 1984 and Thompson, 2005:111). Here, tools like the PESTEL analysis, Porter 5 Forces and the Ansoff matrix can play a major role (Thompson, 2005:111).

This importance of a thorough environment analysis is supported for both NPOs and FPOs. “Although the decision-making can be slow and political in nature (…) dominant leaders (…) [in NPOs] often emerge and are at the heart of strategy-making (…). But it does not have to be this way” (Thompson, 2005:46). In the general aviation industry, organisations offer educational services for pilots in order to receive pilot licences as well as aircraft chartering services. So far, the research on which growth strategy is followed in specific situations is scarce, especially for NPOs.

Therefore, the more specific aim of this thesis is to investigate the potential strategic growth options for NPOs in the general aviation industry, what factors influence the selection of a specific growth strategy and which growth strategy is most successful. Due to little research and the lack of knowledge in this regard, this study will follow an explorative approach.

1.2 Aim of the Study

The aim of this research is to investigate different strategic growth options NPOs have in the German aviation industry competing in mixed industries against FPOs and link it to the NPOs performance. Another aim is to explore the environmental factors that drive the selection of different strategic growth options. Therefore, NPOs within the general aviation industry offering pilot education and charter services are asked in a survey about their perception of macro and micro environmental influencing factors, what their strategy is, if they follow a certain growth strategy, and what their market performance is on the basis of financial data as well as statistical organisation data. The collected data will then be analysed and the findings of the survey will show what growth strategies NPOs in the general aviation market choose and which of them are successful. In combination with the current academic discussion, this paper provides non-profit aviation organisations with a recommendation for specific growth strategies.

Overall, the research study is in line with the work of Mazzarol and Soutar (2008:141), in which they state that “organisations that lacked in a coherent strategy will not perform well and a failure to apply strategic principles may risk the long term sustainability.”

Based on the above mentioned details, the study’s aim can be summarised into two general research questions:

(1) What are the strategic options available to NPOs co-existing with FPOs in the general aviation charter and pilot education business in Germany?
(2) What macro and micro environmental factors drive them, and which of them are successful?

Breaking this overall aim further down, the following three objectives are derived:

a. The favour of NPOs for a certain strategy / strategic direction,
b. the impact of specific growth strategies on NPO performance, and
c. the impact of macro and micro environmental and internal factors on the NPOs chosen growth strategy.

The paper will also provide a comprehensive knowledge of the research topic and the challenges experienced by NPOs in mixed industry markets. This will contribute substantial value to aviation clubs, making them capable to cope with the challenges of a NPO in such mixed industry conditions.

1.3 Structure

After this short introduction in chapter 1, the paper will provide theoretical discussion in chapter 2 where the mixed markets as well as NPOs and FPOs are introduced in detail. Furthermore, the literature review will consist of generic strategies, strategic growth options, the attractiveness of industries and the influencing factors dominating this industry. The second chapter closes with a validation and discussion of limitations on the current literature.

Emphasis on the latest key findings of the research topic then leads to the deviation of propositions for the explorative analysis in chapter 3. This builds the basis of the research framework.

Chapter 4 presents the data collection. First, the survey design with German aviation NPOs are presented and secondly, the sample is discussed. In chapter 5, the data will be analysed and the results of the study presented. In chapter 6, the results are discussed as well as implications drawn. Conclusions and recommendations are articulated in chapter 7. The limitations and suggestions for future research opportunities are suggested in chapter 8. In chapter 9, the author gives an insight into the personal development he experienced during the research of the present paper with regards to his business life.

2. Literature Review

The literature review is subdivided into three sections. First section (chapter 2.1) deals with the current knowledge on the coexistence of NPOs and FPOs with similar products and services in the same industry. In the second section, (chapter 2.2), the strategic growth options are reviewed. Finally, in the third section (chapter 2.3), the internal and external factors are discussed which influence organisational growth strategies.

2.1 Coexistence of NPO and FPO in Same Market Segments

Before discussing the coexistence between NPO and FPO in the same market segments, it is essential to distinguish between these two general organisation forms, as detailed in section 2.1.1 below.

2.1.1 Definition FPO and NPO

The general understanding of FPOs is that they are legally recognised companies, formed to earn profit in order to increase the wealth of the owner(s), e.g. limited company, or public company (Bradford and Gray, 1986:7; Anheier and Seibel, 1993, Hansmann, 1980:835). In light of the general aviation industry - the focus of this study - commercial providers of pilot education and aircraft charter offer the full universe of products and services. These range from educating private pilot licences to commercial and airline transport pilot licences, comprising all sorts of type and class ratings^[4] as well as several aircraft classes for charter. In contrast to this, aviation clubs operating in the form of an NPO only offer pilot education to receive private pilot licences, a limited number of class ratings and do not necessarily aim to educate their students for piloting as a profession. Furthermore, the aircraft charter in FPOs is available to all pilots whereas only members can charter aircrafts in NPOs.

On the other hand, the term “non-profit can be misunderstood … as meaning no-profit (Schaefer, 2004:269) ” but it “… does not mean not making surplus or profits, it is merely about that the profit is not distributed to the corporations” members, management or owners (“non-distribution constraint”)” (Hansmann, 1980:835) but flows back in the public sphere for the public benefit. There are different categories regarding how NPOs are financed and controlled: these are donatives, commercial and mutual (with patrons/board of directors selected by the members), and entrepreneurial (self-perpetuating board of directors) (Hansmann, 1980:840ff.).

Continuing with the above understanding, “Non-profit firms are not, in general, for-profits in disguise”, says Brown and Slivinski (2006:154). Brown and Slivinski (2006:147) state that “...economics explain mission-related non-profit activity as a response to goods … (due to the) inability of potential clients to pay market prices” as well as “(to) contrast the behaviour of mission-driven non-profit firms with the behaviour of their profit-maximising counterparts” (Brown and Slivinski, 2006:140).

The legal form of NPOs and FPOs varies from country to country with regards to their legal and tax framework (Anheier and Seibel, 1993) as shown in Figure 4.

Figure 4 : Major Types of Legal Institutions

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In Germany, NPOs in the general aviation industry are merely organised in the associational system as a member-based private law association (Anheier and Seibel, 1993:1) with a board of directors selected by the members, e.g. registered associations or incorporated associations.

2.1.2 Coexistence of NPOs and FPOs

Specific empirical and/or theoretical/conceptual literature comparing FPOs versus NPOs is somewhat limited. The literature has just begun understanding the decision process that determines whether an organisation is to be set up as NPO and FPO, especially in reference to the series of paper by Bilodeau and Slivinski (1996) and Bilodeau (2000), as quoted in Steinberg (2006:132). Even though the literature begins to shed light on the differences and competition between FPOs and NPOs, the common understanding in the current discussion regarding their coexistence in mixed markets with FPOs is in the initial stage of development (Brown and Slivinski, 2006:155).

So far, the literary discussion of FPO versus NPO primarily deals with their pricing approaches and quality. Regarding pricing, Steinberg and Weisbrod (1998:68) state that “while a profit-taking firm will never sell a service to any client at a price below the cost of producing the incremental cost, a non-profit might do so.” But Glaeser and Schleifer (2001) developed a theoretical model predicting that FPOs charge lower prices and provide lower-quality services. Recently Brown and Slivinski (2006:146) confirmed the statement by Steinberg and Weisbrod (1998:68) that NPOs act as a door opener for people that are not able to pay market prices offering services and products at lower prices or for free. Today we can see that indeed NPOs offer their products and services at a cheaper price than FPOs do.

From the quality perspective, Hansmann (1980:901) argues that “the non-distribution constraint provides a reason to expect that non-profits have less incentive to cheat on the quality of service they provide than for-profits do, when service quality is difficult for clients or donors to monitor.” if there is a severe imbalance of information between producer and customer. Hagy (1998:697) finds that perhaps customers trust a higher level of hard-to-observe quality for the reason if it comes from a NPO. Brown and Slivinski (2006:148-149) refer to “substantial literature that seek to determine in various ways whether predictions about the relative provision of hard-to observe quality of services holds true, and the results are mixed.” Comparing the research of Mocan (2007:773) and Morris and Helburn (2000:393), the role of the legislature sets minimum standards for services that lead to an observable significance for hard-to-observe quality. We can see today that the quality perception in NPOs is not consistently described; however, it can be concluded that the overall quality of NPOs is (perceived) higher than of FPOs.

Apart from pricing strategy and quality production, other differential components between NPOs and FPOs with regards to marketing strategies or growth strategies are not researched. Hence, this study particularly aims to investigate NPOs as there is hardly any knowledge on their behaviour.

Rose-Ackermann (1996:718) discusses the coexistence of different organisation forms within markets asking for the persistence of mixed service sectors and why one form is not driving out the other. There are different perspectives on coexistence that have to be explained regarding tax regulations, a possible contract failure, quality differences, or the degree of free entry to an industry.

Brown and Slivinski (2006:152) find with regards to tax that “the existence of tax advantages for nonprofits does not, on its own, explain the varied presence across industries.” However, “one might see a larger market share of nonprofits in states in which their tax exemptions give them a greater advantage over their for-profit counterparts” (Hansmann, 1987).

Contract failure is one of the oldest arguments for the existence of NPOs and arises in markets in which consumers are at an informational disadvantage regarding the quality of services (Steinberg, 2006:119).

Following the after sales model of Glaeser and Schleifer (2001), if customers find that NPOs produce higher quality, they are willing to pay higher prices than FPOs, which may cause an imbalanced market. Brown and Slivinski (2006:153) describe the key feature of the Lakdawalla-Philipson model that if “there is free entry into the industry, the two types of firms can coexist only if there is a scarcity of entrepreneurs with profit-deviating preferences; otherwise, the non-profit firms would be the only producers by virtue of the assumption that non-profit status implies lower costs, due to tax advantages.” This will then provide NPOs with a competitive advantage, and is a proposition that we will later examine as one could conclude that due to such reasons as tax regulations, NPOs follow a cost leadership strategy. The current literature gives no clear picture about the acting of NPOs and FPOs coexisting in the general aviation industry.

2.2 Strategic Options

This chapter is further divided into three sections: 0 defines and explains the concept of strategy; 0 and 2.2.3 describe models that help to identify different strategic positions in an organisation. These chapters also strengthen the understanding of strategic decisions characteristic, different strategic priorities, and people involved, which builds the basis for strategic choice in an organisation at the level of single business or organisational units.

2.2.1 Definition of Strategy

Grant’s (1991:114) definition of strategy as “the match an organisation makes between its internal resources and skills … and the opportunities and risks created by its external environment” basically points to two major influencing factors of a strategy: the inner and the outer environment. Johnson et al. (2008:3) adds inter alia in the chronological dimension and describes in a nuanced light that “strategy is the direction and scope of an organisation over the long term, which achieves advantage in a changing environment through its configuration of resources and competences with the aim of fulfilling stakeholder expectations.” Porter (Porter n.d., cited by Kotler and Keller, 2006:56) aggregates its definition of strategy to a value-based meta-level pointing to “the creation of a unique and valuable position involving a different set of activities.”

Looking at the aviation industry, strategic alliances or mergers are for example a common growth strategy in the commercial aviation industry, e.g. the merger of Lufthansa and Austrian in 2009 and the merger of British Airways and Iberia in 2010. Following Ansoff (1965) in the above cited mergers, a merger was in combination with geographical market development.

2.2.2 Strategic Planning

To formulate organisational strategy and allocate resources to implement those strategies, organisations need to put in place a strategic planning. There cannot be any strategy without strategy planning. Miles and colleagues (1978:550) note that the least successful organisations are those that use reactive strategies or do not have a strategy at all. Strategic planning means a thorough analysis of the environment, the industry and the competitive landscape in order to derive meaningful and proper strategies. The study of Mazzarol and Soutar (2008:149) shows that in the higher educational services industry, which they analyse, only educational institutions with a coherent strategy in terms of Porter (1979) are successful. Nicholls and colleagues (1995) find that passivity in strategic choice means that organisations cannot take advantage of the market opportunities and may not be able to make clear arguments and derive correct scenarios for the future. This proves that it is essential prior to making strategic decisions to know where the organisation is from a strategic point of view with regards to Porter’s generic strategies (Porter, 1980). Methods like the PEST analysis and Porter’s five forces (Porter, 1979, 2008) support external environment situational analysis. This discussion will show the importance of strategic planning for NPOs.

Two tools often used in strategic planning are Porter’s generic strategies (Porter, 1980) and the growth matrix of Ansoff (1965). Porter’s theory is based on usually unchanging assessment of generic strategies whereas Ansoff’s matrix is more short-termed and provides strategic options for growth or change.

According to Porter (1980), a firm must formulate a business strategy that incorporates either cost leadership, or differentiation, or focuses on a niche in order to achieve a sustainable competitive advantage and long-term success. It is important for the survival of a company to create and maintain a competitive advantage in each and every area of business (Porter, 1980). The three generic strategies, namely differentiation, cost leadership and focusing on a niche, provide a good starting point for strategic thinking (Kotler and Keller, 2006:56).

The “cost leadership” strategy means that business firms basically try to achieve the lowest cost in operations which is often supported by driving the learning curve regarding corporate efficiency or size making use of economies of scale, scope and others (Porter, 1980). Here, there is no necessity to compete on prices. However, the business structure of firms following such strategies is designed for low cost structure and management. Hence, such companies are able to compete on price, although this is not their first objective. For example, companies like Easy Jet or Aldi follow this strategy.

The “differentiation” strategy merely focuses on superior performance that is perceived as unique in an area that benefits customers like quality or service (Porter, 1980). It allows firms to sell their products at different or even premium prices, even though they are essentially the same. An example for this strategy is Apple or Bang & Olufsen.

The strategy “focus” considers certain market segments in order to differentiate or lead in cost (Porter, 1980). It is also known as segmentation or niche strategy, tailoring the marketing mix to a specialised market in order to meet the market needs. Southwest-Airline follows such a strategy providing short-haul point-to-point flights.

Porter stresses the idea that a firm should adopt only one strategy because otherwise a company will fall into the ’stuck in the middle’ scenario (Porter, 1980). The idea of following more than one strategy is risky as one loses the entire focus of the organisation. Thus, companies no longer succeed in a clear direction for future trajectory. Porter (1980) further states that the cost leadership and the differentiation strategy are mutually exclusive. Low cost leadership and differentiation clash with each other resulting in no proper direction.

Later, Porter (2008) revised this model and put up with the fact that a hybrid business strategy can basically exist. “Competitive advantage can be divided into two basic types: lower costs than rivals, or the ability to differentiate and command a premium price that exceeds the extra costs of doing so. Any superior performing firm has achieved one type of advantage, the other or both”. Again, Southwest-Airlines manage to focus on point-to-point flights on a low cost basis.

Ansoff (1957) proposes a useful framework for detecting new intensive growth opportunities called the “product-market expansion grid” or “growth matrix”. This framework forms the basis of growth as Ansoff states that in order “to retain its [company] relative position, a business firm must go through continuous growth and change” (Ansoff, 1957:113). It should not be disregarded that Ansoff’s growth matrix is emphasising on external aspects of diversification only. This means that external factors can essentially influence the decision making process in certain strategic options, according to Ansoff.

Ansoff’s growth matrix can be seen as a simple way of generating basic alternative directions for strategic development (Johnson et al., 2008:257). Ansoff (1957) describes four potential growth strategies based on the two dimensions “market” and “product”, as shown in Figure 5. In the short-term, with a low market risk, companies can concentrate on market penetration with existing products in existing markets. Two mid-term strategies are either product development with new products in existing markets or market development with existing products in new markets. These strategies are of medium risk. Further, companies can decide to diversify with new products in new markets. This is a long-term strategy, incorporating the highest risk. Normally, companies should not focus on one strategy but balance different ones. In the following explanation of the growth matrix, the paper will provide examples for each strategy having been put in place by Starbucks.

Figure 5 : Ansoff’s Growth Matrix

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Source: Kotler and Keller (2006:48)

With market penetration, the organisation stays within the same market, with the same products and fights for increasing its market share. Its advantages are that the organisation can rely on its known strategic capabilities and core competences and does not need to venture into untested markets. However, when the company seeks greater market penetration, two constraints may occur: Retaliation from competitors exacerbating industry rivalry and legal constraints with regards to mergers and acquisitions ending in market dominating organisations. This strategic alternative is especially applicable to small organisations concentrating their efforts on specific market niches (Thompson et al., 2005:494). Starbucks, for example, penetrated the market by building more and more stores and thus selling more coffee.

Market development offers existing products in new markets like new segments, new users, or even new countries. Often such strategy fails because of poor marketing skills and brands to make substantial progress in an unfamiliar market with unfamiliar customers. However, when one views new markets as new countries, this strategy is successful (Thompson et al., 2005:494). Since 1996, Starbucks is expanding into other countries, operating more than 5,700 stores outside the USA. This shows their strategic decision to develop markets.

Product development means limited extension of organisational scope and bringing new or modified products into existing markets. There are two reasons why this can be risky: new strategic capabilities are needed to be involved, and R&D^[5] departments to develop new or modify existing products. Product development was followed by Starbucks when they started to offer muffins, smoothies, cold drinks, sandwiches and other products to their expanding consumer base.

Diversification takes the organisation away from known markets and products. This can result in an organisation to learn a lot establishing learning capabilities. Successful companies potentially achieve value-creation such as efficiency gains, stretching corporate parenting capabilities, and increasing market power. Starbucks, for example, also followed a diversification strategy when they introduced their credit cards.

Business diversification can be basically divided into two main sections: related diversification and unrelated diversification. The related diversification is either with regards to vertical integration, meaning moving forward or backward in the value chain of the existing business. Horizontal integration means developing activities that are on the same level of the value chain of the current business but in another segment. Unrelated diversification involves development in either the same value chain, or on the same level, but within the current value network (Thompson et al., 2005:267).

2.3 External and Internal Factors

This study takes into consideration the factors that possibly influence strategic option decisions. As seen previously, the strategic choice is the result of strategic planning. Strategic planning means to analyse the environment. Thus, the influencing factors of strategic growth decisions are considered and discussed: the external side, such as the environmental context.

According to Johnson and colleagues (2008:54), there are different layers of a business environment, as shown in Figure 6. Consecutively, each layer will be discussed.

Figure 6 : Layers of the business environment

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Source: Johnson et al. (2008:54)

The macro-environment as the outer-level layer more or less impacts all organisations acting in a certain environment. The PESTEL analysis (Thompson, 2005:168) is one tool to analyse this layer and is described in chapter 2.3.1. The industry layer consists of those organisations that produce the same products and services. The competitor or market layer comprises the most immediate layer surrounding organisations (Johnson et al., 2008:54-55). The competitor layer can be analysed using Porter’s Five Forces (Porter, 1979, 2008) as described in chapter 2.3.2. The micro-environment can be analysed using Ansoff’s market matrix with regards to growth options or Porter’s generic strategies, as already described in chapter 0. Thus, in this study we explore the impact of macro environmental factors on the strategic options NPOs follow.

2.3.1 Environmental Analysis with PESTELTheory

The PESTEL analysis provides a wide overview assessing the influencing factors on the possible failure or success of particular strategies in the business macro-environment (Thomas 2007 in Johnson et al., 2008:55).

PEST stands for Political, Economic, Social and Technological factors. Extending the PEST framework with Environmental and Legal factors produces the PESTEL analysis. PESTEL “analysis provides the broad data from which to identify key drivers of change (that) can be used to construct scenarios of possible futures” (Johnson et al., 2008:54-55).

The components of PESTEL mean the following:

(a) Politics highlights the not only the role of governments in tax policy, labour law, environmental law, trade restrictions, tariffs, and political stability but also the influence of governments in health, education, and infrastructure of a country, which undoubtedly has a bearing on the company’s business (Johnson et al., 2008:55; Thompson, 2005:168).
(b) Economic refers to macro-economic factors that can be related to the capital cost or economic cost of exporting or importing goods such as exchange rates, interest rates, business cycles and differential economic growth rates around the world (Johnson et al., 2008:54‑55; Thompson, 2005:168). These factors might influence the strategic growth option NPOs follow.
(c) Social influences include the change in culture or demographics. For instance, the different consumer age groups and ongoing trends influence the products and services delivered by a company (Johnson et al., 2008:54-55; Thompson, 2005:169-170).
(d) Technological influences refer to innovations such as the internet, which may prove to be crucial for the creation of competitive advantage (Johnson et al., 2008:55; Thompson, 2005:170-71).
(e) Environmental factors represent not only issues like industrial pollution and waste, but also the impact of weather and climatic changes on the business. (Johnson et al., 2008:55).
(f) Legal aspects embrace legislative constraints, company mergers, acquisition, discrimination law, consumer law, antitrust law, and employment law. These factors can influence the way how a business operates, its cost situation, and its product demand (Johnson et al., 2008:55).

In total, one proposition for this paper is that the extent of these different macro environmental factors will have an influence on what kind of growth strategy and generic strategy NPOs follow.

2.3.2 Competitive Analysis with Porter’s Five Forces

Porter (1980) argues that five forces determine the profitability and intrinsic long-run attractiveness of an industry, a market or a market segment, as shown in Figure 7. At the heart of this concept is the competitive strategy of the business rivals, especially if existing competitors produce the same products or services. The intensity of rivalry will be higher with more competitors in the market; and when the market growth is higher, it is more difficult to exit the industry.

In addition, the model contains the assessment of potential threats from the environment such as the threat of entry of new market participants into the industry, the threat of substitutes to products and services of the industry, the power of buyers of products and services within one industry as well as the power of suppliers into the industry (Johnson et al. 2008:55, Kotler and Keller, 2006:342, Thompson, 2005:171-172). The force of suppliers bargaining power will become stronger when its concentration in the market is higher, implying a higher potential of forward integration. In the same line, when the bargaining power of buyers will have a stronger influence on the competitive intensity, the buyer’s volume and concentration in the market will be greater, implying a higher ability to integrate them backwardly.

With regards to the threat of new entrants, this force will have a higher influence over the lower the entry barriers, the more established the experience curve in the industry, the better the access to sales and distribution channels and as less loyal customers are to established products. Finally, the fifth force regarding the threat from substitute product will grow when the application is similar or e.g., the price-performance ratio is better (Porter, 1980).

Figure 7 : Porter’s Five Forces

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Source: Porter (2008:80)

With regards to the influencing forces, in Makadok’s (2001:388-389) view “a resource is an observable asset that can be valued and traded – such as a brand, a patent etc. [but] a capability … is not observable [and] cannot be valued” (Hoopes et al., 2003:890). Hoopes et al. (2003) argue that only value and inimitability are important out of these options. We can see that there are resources in terms of Porter’s Five Forces that can be respectively copied and others cannot.

2.4 Empirical Studies

Acar and Zehir (2011) studied showed that cost leadership strategies had a positive impact on the growth and financial performance of the business whereas the differentiation strategy impacted the direct efficiency of the business performance in terms of its growth performance. Further, no such direct efficiency impact was found on the company’s financial performance.

Similarly, Teeratansirikool and Siengthai (2011) studied 101 Thai listed companies, specifically examining their organizational performance, performance measurement, their competitive strategy and the relationship between them. The research analysis showed both direct and indirect significance in the context of differentiation strategy on the organizational performance. It also showed that the competitive strategies followed by the listed companies were enhanced the performance of the organization through performance measurement.

Collecting data between the years 1992 to 2002, Leitner and Gueldenberg (2003) studied numerous small and medium-sized enterprises in Austria with the intention of ascertaining the impact of generic strategies on the performance of selected firms. Their results showed a distinct pattern: SMEs that do not implement any generic strategies at all are less than successful than those SMEs employing three generic strategy groups.

2.5 Conclusion

The above discussion shows that there exist numerous models for organisations, no matter whether NPOs or FPOs, to select their strategic growth options. These strategic options refer to the internal decisions made in organisations. With the help of Porter’s generic strategies (Porter, 1980), an organisation is able to draw a picture of its organisation’s current positioning. This approach, however, needs a lot of time and thus it is not often applied in practice, even though it provides important competitive strategies to follow.

Another concept used to look at growth options is the growth matrix by Ansoff (1965) which is based on a market and/or product level. In order to evaluate the external factors which might influence the strategic decisions of NPOs, the PESTEL as well as Porter’s Five Forces are considered.

In total, this study and the following empirical data collection and analysis aim at exploring what kind of external factors influence the choice of NPOs with regards to Ansoff’s growth strategies and Porter’s generic strategies. Furthermore, this analysis will provide us with an overview of what kind of strategies are chosen by NPOs. Next, what is of major interest is to find out and explore which of these potential strategies are the most successful and whether NPOs in the general aviation industry select the strategies with the highest performance potential. So far, there is scarce research on the relationship between strategic options and the performance of NPOs.

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^[1] General aviation is all civilian flying except scheduled passenger airline service and except military (AOPA, 2009).

^[2] Private Pilot License + Instrument Rating License

^[3] CAGR - Compound Annual Growth Rate provides a smoothed rate of growth of financial statement items or investment yields (Kothari and Barone, 2006:279)

^[4] Class Ratings: Single/multi-engine piston aeroplane (land/sea), Single-engine turboprop aeroplane (land), Single-engine piston touring motor gliders (land)

Type Ratings: Single-engine, Multi-engine turboprop (land), Multi-engine turboprop (sea), Multi-engine turbo-jet (land), Multi-pilot aeroplanes (JAA, 2008)

^[5] R&D – Research and Development